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URL: http://www.bailii.org/uk/cases/UKHL/2008/44.html
Cite as: [2009] HLR 8, [2008] 34 EG 94, [2008] RVR 236, [2008] L & TR 25, [2009] AC 39, [2008] 2 EGLR 57, [2008] 26 EG 116, [2008] 2 P & CR 19, [2008] NPC 75, [2008] 3 WLR 244, [2009] 1 AC 39, [2008] UKHL 44, [2008] 4 All ER 382

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Judgments - Earl Cadogan and others (Respondents) v 26 Cadogan Square Limited (Appellants)Howard de Walden Estates Limited (Respondents) v Aggio and others (Appellants)

HOUSE OF LORDS

SESSION 2007-08

[2008] UKHL 44

on appeal from: [2007] EWCA Civ 499

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Earl Cadogan and others (Respondents) v 26 Cadogan Square Limited (Appellants)

Howard de Walden Estates Limited (Respondents) v Aggio and others (Appellants)

Appellate Committee

Lord Hoffmann

Lord Scott of Foscote

Lord Walker of Gestingthorpe

Baroness Hale of Richmond

Lord Neuberger of Abbotsbury

Counsel

Appellant in first appeal:

Edwin Johnson QC

Adam Smith

(Instructed by Bircham Dyson Bell LLP )

Appellant in second appeal:

Anthony Radevsky

(Instructed by Forsters LLP)

Respondents in first appeal:

Philip Rainey

(Instructed by Pemberton Greenish )

Respondents in second appeal:

Judith Jackson QC

Katharine Holland

(Instructed by Speechly Bircham LLP )

Hearing date:

12 AND 13 MAY 2008

ON

WEDNESDAY 25 JUNE 2008

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Earl Cadogan and others (Respondents) v 26 Cadogan Square Limited (Appellants)

Howard de Walden Estates Limited (Respondents) v Aggio and others (Appellants)

[2008] UKHL 44

LORD HOFFMANN

My Lords,

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Neuberger of Abbotsbury. For the reasons he gives, with which I agree, I too would allow these appeals.

LORD SCOTT OF FOSCOTE

My Lords,

I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Neuberger of Abbotsbury and for the reasons he gives, with which I am in full agreement, I, too, would allow these appeals.

LORD WALKER OF GESTINGTHORPE

My Lords,

I am in full agreement with the opinion of my noble and learned friend Lord Neuberger of Abbotsbury, which I have had the advantage of reading in draft. I too would allow these appeals.

BARONESS HALE OF RICHMOND

My Lords,

For the reasons given in the opinion of my noble and learned friend, Lord Neuberger of Abbotsbury, with which I entirely agree, I too would allow these appeals and restore the decisions of the first instance judge in each case.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

Chapter II of Part I of the Leasehold Reform, Housing and Urban Development Act 1993 confers a right on "a qualifying tenant of a flat" to acquire a new long lease of the flat from his landlord. The question raised on these two appeals is whether the lessee of premises (such as a block of flats), which includes property other than flats, can be a qualifying tenant of any of the flats comprised in those premises This issue turns upon the proper construction of the 1993 Act, which has been amended from time to time, most notably by the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002.

The factual and procedural history

In each of these two cases, the whole (or most) of a self-contained building converted into a number of self-contained units, was let under a lease ("the head lease") for some 60 years at a ground rent. In Cadogan, the building has six storeys, of which the lower three are used as offices, which are in part underlet, and the upper three consist of a maisonette, which had been subject to an assured shorthold tenancy, but is currently vacant. In Howard de Walden, the five storeys of a building have been converted into self-contained residential flats, of which the upper three are subject to long underleases, and the lower two are let by assured short-hold tenancies. Each building includes common parts (that is internal parts, such as entrance hall, landings and stairs, used by all or some occupiers) and external areas for parking. These common parts and parking areas are included in the respective head leases, but not in any of the underleases, although the underlessees have been granted rights over them in their respective underleases.

In each case, the head lessee served notice on the freeholder pursuant to Chapter II of Part I of the 1993 Act ("Chapter II") to acquire, in Cadogan, a new lease of the maisonette consisting of the three upper floors (which is a "flat" for the purposes of the 1993 Act), and, in Howard de Walden, a new lease of the ground floor flat, and, subsequently, a new lease of the basement flat. In each case, the freeholder served a counter-notice denying the head lessee's claimed right, contending that the head lessee was not "a qualifying tenant" of the flat concerned.

This led to proceedings in the County Court, in which the judge (Judge Crawford Lindsay QC in Cadogan, and Judge Paul Collins in Howard de Walden) held that the head lessee was "a qualifying tenant" of the relevant flat. These conclusions followed a decision of Mr David Donaldson QC, sitting as a deputy High Court judge in Maurice v Hollow-Ware Products Ltd [2005] 2 EGLR 71. The freeholders' appeals were heard together by the Court of Appeal [2007] EWCA Civ 499, [2008] Ch 26, who allowed both appeals. The head lessee in each case now appeals to your Lordships' House.

The 1993 Act

Chapter I of Part I, which extends from sections 1 to 38, of the 1993 Act ("Chapter I") is entitled "Collective enfranchisement in case of tenants of flats". It contains provisions to enable lessees in blocks of flats, who are able to satisfy certain conditions, to get together to enfranchise - viz to acquire the freehold interest in the block.

Chapter II is entitled "Individual right of tenant of flat to acquire new lease". It begins with section 39 which is concerned with identifying the type of lessee who is entitled to have the right to a new long lease. In its current form, it provides as follows:

"(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; . . .

(3) The following provisions, namely—

(a) section 5 (with the omission of subsections (5) and (6)),

(b) section 7, . . .

shall apply for the purposes of this Chapter as they apply for the purposes of Chapter I; and references in this Chapter to a qualifying tenant of a flat shall accordingly be construed by reference to those provisions. …

(4) For the purposes of this Chapter a person can be … the qualifying tenant of each of two or more flats at the same time, whether he is tenant of those flats under one lease or under two or more separate leases.

(8) …'the relevant date' … means the date on which notice of the claim is given … under section 42."

Section 5, part of which is incorporated by reference into section 39 by subsection (3)(a), is in these terms so far as relevant:

"(1) Subject to the following provisions of this section, a person is a qualifying tenant of a flat for the purposes of this Chapter if he is tenant of the flat under a long lease. . .

(2) Subsection (1) does not apply where—

(a) the lease is a business lease; ….

(3) No flat shall have more than one qualifying tenant at any one time.

(4) Accordingly—

(a) where a flat is for the time being let under two or more leases to which subsection (1) applies, any tenant under any of those leases which is superior to that held by any other such tenant shall not be a qualifying tenant of the flat for the purposes of this Chapter .. .".

By section 5(5), which applies to Chapter I but not to Chapter II, where a person would otherwise be a qualifying tenant of three or more flats in a building, those flats shall be regarded as having no qualifying tenant. Section 7, similarly incorporated into Part II by section 39(3)(b), defines a "long lease" as being, subject to certain immaterial exceptions, a lease granted for 21 years or more.

Section 40 identifies "the landlord for the purposes of this Chapter". Section 42 provides for a claim under Chapter II to be initiated by a "tenant's notice" which must contain "sufficient particulars of [the] flat to identify the property to which the claim extends" - see section 42(3)(b)(1). By subsection (3)(c), the tenant's notice must also state the premium which the tenant proposes to pay, and, by subsection (3)(f), the date by which the landlord must give a counter-notice (which must be at least two months after the date of the notice). By section 45, the landlord's counter-notice must be served by the specified date, and must either admit or not admit the tenant's right. It must also state which of the terms proposed in the tenant's notice are agreed or rejected, and, in relation to those which are rejected, it must state the landlord's counterproposals.

The County Court is given powers to determine the validity of the tenant's notice under section 46. By section 49(1), if the landlord fails to give a counter-notice, the County Court may, subject to certain exceptions, "make an order determining, in accordance with the proposals contained in the tenant's notice, the terms of acquisition".

Section 56 (1) provides that, where a qualifying tenant has a right to acquire a new lease and has given a notice in accordance with section 42, save where Chapter II otherwise provides:

"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…

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

Section 57 is an important section for present purposes, and it includes the following:

"(1) …[T]he 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, . . .

(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 an 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 . . ."

Section 57(8A) says that a person entering into a covenant in the new lease "as landlord … shall be entitled to limit his personal liability to breaches of that covenant for which he is responsible". Section 57(9) provides, where there is a third party (eg a management company) to the existing lease, it is required to be party to the new lease, but only up to "the term date of the existing lease". By section 57(10), where such a third party is required to carry out a function under the existing lease, then, under the new lease, from the date of expiry of the existing lease, provision should be made for that function to be carried out "by the third party or by some other person".

Section 58 covers cases where an existing interest is subject to a mortgage. Section 58(4) states that "where the existing lease is, immediately before its surrender on the grant of a lease under section 56, subject to any mortgage, the new lease shall take effect subject to the mortgage in substitution for the existing lease…".

Subsection (2) of section 62, the final section of Chapter II, is in these terms:

"(2) Subject to subsection (3), references in this Chapter to a flat, in relation to a claim by a tenant under this Chapter, include any garage, outhouse, garden, yard and appurtenances belonging to, or usually enjoyed with, the flat and let to the tenant with the flat on the relevant date …"

Chapter VII of Part I of the 1993 Act has provisions which apply to all Chapters of Part I. It includes section 91, which is concerned with the jurisdiction of the Leasehold Valuation Tribunal ("LVT"). Section 91(2)(a) gives a LVT jurisdiction to determine "the terms of acquisition … [of] any new lease … to be granted … in pursuance of Chapter II", which include "any matter which needs to be determined for the purposes of any provision of Schedule … 13". Section 91(2)(e) empowers a LVT to determine "the apportionment between two or more persons of any amount (whether of costs or otherwise) payable by virtue of any … provision [of Chapter I or II]". Section 91(9) says that a LVT may "specify in its determination property which is less extensive than that specified in [a tenant's section 42 notice]".

Also in Chapter VII, section 101 contains provisions and definitions applicable to all Chapters of Part I. Section 101 (1) has the following relevant definitions:

" 'common parts', in relation to any building or part of a building, includes the structure and exterior of that building or part and any common facilities within it; . . .

'flat' means a separate set of premises (whether or not on the same floor)—

(a) which forms part of a building, and

(b) which is constructed or adapted for use for the purposes of a dwelling, and

(c) either the whole or a material part of which lies above or below some other part of the building…"

By section 101(2), it is provided that the expression "lease" has the same meaning as "tenancy" and that it includes "a sub-lease or sub-tenancy". Section 101(3) is in these terms:

"(3) In this Part any reference (however expressed) to the lease held by a qualifying tenant of a flat is a reference to a lease held by him under which the demised premises consist of or include the flat (whether with or without one or more other flats)."

So far as the premium for the grant of the new lease is concerned, it is to be calculated in accordance with the provisions of Schedule 13. Para 2 of that Schedule provides that:

"The premium payable by the tenant in respect of the grant of the new lease shall be the aggregate of—

(a) the diminution in value of the landlord's interest in the tenant's flat as determined in accordance with paragraph 3,

(b) the landlord's share of the marriage value as determined in accordance with paragraph 4, and

(c) any amount of compensation payable to the landlord under paragraph 5."

Para 5 is, so far as relevant, in the following terms:

"(1) Where the landlord will suffer any loss or damage to which this paragraph applies, there shall be payable to him such amount as is reasonable to compensate him for that loss or damage.

(2) This paragraph applies to—

(a) any diminution in value of any interest of the landlord in any property other than the tenant's flat which results from the grant to the tenant of the new lease; and

(b) any other loss or damage which results there from to the extent that it is referable to the landlord's ownership of any such interest."

Finally, I must refer to Schedule 11, which deals with cases where a flat is subject to a hierarchy of leases. It identifies a "competent landlord" whose acts are binding on all the other landlords. Where an underlessee exercises a right under Chapter II, any new lease granted by the freeholder would, at least on the face of it, be reversionary on the head lease. This problem is solved by paragraph 10, which provides for a notional surrender of the head lease, before the grant of the new lease to the underlessee, which is followed by a notional re-grant of the head lease.

The issue between the parties

The case for the freeholders is that neither of the appellant head lessees is a "qualifying tenant of a flat" for the purposes of Chapter II. Miss Judith Jackson QC, for the freeholder in Howard de Walden, contends that a lessee cannot be a "qualifying tenant of a flat" if the premises demised by his lease consist of a building which includes a number of flats. Mr Philip Rainey, for the freeholder in Cadogan, contends that a lessee cannot be "qualifying tenant of a flat" if his lease includes property other than "flats" within the meaning of the 1993 Act. Although they formulate their respective cases slightly differently, the supporting arguments and reasons advanced on behalf of the respondents are not merely mutually consistent, but for all practical purposes identical.

The appellant head lessees, through Mr Anthony Radevsky in Howard de Walden, and Mr Edwin Johnson QC in Cadogan, contend that, provided, of course, the lease is a long lease, a lessee under a lease, whether it is a head lease or not, of any property (including a block of flats) which is or includes a flat can be a qualifying tenant of that flat, unless, of course, there is an under-lessee of that flat who is himself a qualifying tenant.

In the light of the way in which the Court of Appeal approached this matter, and of the arguments which have been advanced so well before your Lordships, it seems to me that a two stage approach to the issue is appropriate. The first stage involves considering the issue by reference to the statutory language. If, as I believe, this gives a tolerably clear answer, one must then consider whether the rights, obligations and procedures laid down in Chapter II require a different conclusion.

The statutory language

The first subsection of Chapter II, namely section 39(1), confers the relevant right on "a tenant of a flat". That might be said to be a neutral expression in the present context, because it could be limited to the relatively narrow concept of a lessee of a flat and no other property, or the rather wide notion of a lessee of a flat together with other property. However, in the absence of any further indication either way, I would have thought that its natural meaning extended to the lessee of a property which included, but was not limited to, a flat.

Having said that, section 39(4), set out in para 10 above, makes it clear that, at the very least, the expression "a tenant of a flat" extends to the lessee of a flat together with another flat or other flats. It is said on behalf of the respondents that the inclusion of section 39(4) is an indication that the narrower meaning was right, because, if the expression had the wider meaning, it would have been unnecessary to include section 39(4). I do not agree. Section 39(4) is not concerned with the definition of "a tenant of a flat" but with who can be a "qualifying tenant of a flat". In other words, it effectively takes it for granted that "a tenant of a flat" in section 39(1) extends to a lessee under a lease of more than one flat, and merely emphasises that such a person can be a "qualifying tenant" of any such flat.

Accordingly, if one confines oneself to section 39, it appears clear that the lessee of a number of flats can, in relation to each flat, be "a tenant of a flat" under section 39(1). In the absence of any clear indication, it is hard to see how it does not follow, as a matter of logic, that the lessee of any property which includes one or more flats is, in relation to each such flat, "a tenant of a flat".

That view appears to me to be strongly reinforced by section 101(3), set out in para 20 above. Its effect is that where "demised premises consist of or include the flat", the lessee can be a qualifying tenant of the flat. The expressions "the demised premises" and "include" are, importantly for present purposes, unqualified. It was suggested that the bracketed closing phrase of the subsection, "(whether with or without one or more other flats)" effectively amounted to a limitation, and indicated that "the demised premises" other than the relevant flat could only be "one or more other flats", and not other property, such as common parts. As a matter of language, that argument simply does not run, in my judgment. The bracketed words merely emphasise that the fact that more than one flat is included in the demised premises would not prevent the lessee of those premises being a "qualifying tenant" of any of those flats.

The view that a lessee of premises whose lease includes a flat (irrespective of whether there are other flats or any other property included in the demise) can be a qualifying tenant of that flat is reinforced by the reference in section 57(1)(a) to "property" which is "included in the existing lease but not comprised in the flat". If the only other premises which could be included in a lease to a qualifying tenant, in addition to the relevant flat, was another flat or other flats, one would have expected the reference to be to "other flats" rather than to "property".

In these circumstances, it seems to me clear that a lessee under a lease which includes a flat together with other premises, be it another flat, other flats, or other property of whatever nature, is, according to ordinary principles of interpretation, and subject to any clear indication to the contrary in the 1993 Act, "a tenant of a flat" for the purpose of Chapter II. As a matter of language and logic, there is no ground for excluding a lease (be it a head lease or any derivative lease), either of a block of flats, or of property not limited to flats, from the ambit of this conclusion.

At the beginning of her "discussion and conclusions" in the Court of Appeal, in para 28, Arden LJ, with whom Mummery and Jacob LJJ agreed, said that there was "no express statutory reference to head leases in Chapter II…", although there were "references to intermediate leasehold interests". She then went on to say that there were "a large number of individual provisions in …or incorporated into [Chapter II] which may or may not indicate that head lessees are treated like other tenants".

This approach appears to me to involve inventing a gap where none exists. Whether one approaches the question by reference to ordinary language or property law, the expression "lease" is apt to include a term of years granted by the freeholder or by someone who himself holds a lease from the freeholder whether directly or not. If there were any doubt about that in relation to Part I, it must be allayed by the definition in section 101(2), referred to in para 20 above. It is also clear beyond doubt that a lessee under a head lease which is subject to an underlease of the flat can be a "tenant of a flat" in the light of section 5(3) to (5), quoted in para 11 above. As a matter of language or legal concept, there is simply no basis for treating a lease of a block of flats as a special type of lease, which, as it seems to me, is what Arden LJ's analysis involves.

For these reasons, it appears to me clear that, at least if one looks at the directly relevant statutory provisions, the two appellants in the present case were "qualifying tenant[s]" of the flats in respect of which they respectively served notices. However, that is not the end of this appeal, because it is said on behalf of the respondents that, if one examines other provisions of Chapter II to see how they would apply in the instant cases, it is clear that the legislature did not intend or envisage lessees such as the appellants being "qualifying tenants" for the purpose of Chapter II. I accept that, as a matter of principle, it is legitimate to examine the operational provisions of a statute in order to decide whether they justify implying a restriction on the class of persons who can benefit from it, even though such a restriction cannot be gathered from the provisions which directly relate to the identification of such persons. However, it appears to me that it would normally only be right to imply such a restriction where it is plainly justified by the operational provisions, and where the nature of the restriction is clear.

It is therefore necessary to consider the various reasons that have been raised by the respondents and largely accepted by the Court of Appeal, as to why each appellant in the present case, despite apparently being "a tenant of a flat" nonetheless cannot take advantage of Chapter II. However, before doing so, it is appropriate briefly to address the broader policy argument which the respondents invoke to provide the context in which their arguments based on the more operational aspects should be considered.

The respondents' policy argument

The respondents contend that, as a matter of policy, it cannot have been intended that property investors, whether public companies or private individuals, should normally be able to benefit from the provisions of Chapter II. My noble and learned friend, Baroness Hale of Richmond, accurately described the policy behind Part I of the 1993 Act in her opinion in Majorstake Ltd v Curtis [2008] 2 WLR 338, paras 21 to 23 in the following terms:

"[U]nless the lease has been granted for hundreds of years, it eventually becomes a wasting asset. The capital originally invested in it dwindles away. Eventually the lease becomes unmortgageable and unmarketable. The leaseholder therefore needs to negotiate the purchase of the freehold or a lease extension from the landlord. But, as the authors of Hague on Leasehold Enfranchisement 4th ed (2003), para 1-14 observe, 'there are few comparable situations where the bargaining positions are quite so unequal'. There is also a positive disincentive to the leaseholder to spend any more money than absolutely necessary in maintaining or improving the flat…

The 1993 Act was passed to remedy the problems arising from long leaseholds of flats by enabling leaseholders to acquire either the whole premises or a new lease at a price which the legislators thought fair."

That formulation of the statutory policy does not appear to provide much assistance for the respondents' argument that a lessee of a block of flats should not be entitled to a new lease of individual flats, which have no under-lessee who is a qualifying tenant. The policy described by Baroness Hale can be said to apply as much to lessees who are commercial investors, as in Cadogan, or will trustees, as in Howard de Walden, as to those who are residents. Furthermore, the notion that the 1993 Act was not intended to benefit any lessee other than a resident occupier cannot be justified now that the residence requirement, contained in the original section 39(2)(b), has been removed by the 2002 Act. Quite apart from this, as already explained, by virtue of section 5, the legislation has always envisaged that a lessee whose lease comprised a number of flats could claim the benefit of Chapter II.

A stronger point, at least on the face of it, which can be made on behalf of the respondents, is that, if the present appeals succeed, the logical conclusion must be that a lessee under a long lease of a block of, say, 28 flats, none of which is subject to long underleases, would be entitled to claim the benefit of Chapter II in relation to each of the 28 flats at the same time, if he wanted. That is indeed what was decided in the case which was followed at first instance in the present cases, namely Maurice v Hollow-Ware Products Ltd [2005] 2 EGLR 71.

I accept that such an outcome might appear surprising, at least at first sight, to some people. However, a number of points can be made in reply. First, as already mentioned, it is not a result inconsistent with Baroness Hale's explanation of the purpose of Part I of the 1993 Act. Secondly, it is a result which the respondents accept would arise if the demise was of the 28 flats, rather than of the building containing the 28 flats. Thirdly, it is a result which the legislature has to some extent considered in section 5(5), which is referred to in para 11 above, and which applies only to Chapter I and not to Chapter II. Fourthly, under Schedule 13, the freeholder is entitled to compensation which should be, at least roughly, equal to his financial loss. Finally, as my noble and learned friend Lord Scott of Foscote pointed out during argument, the result is a by-product of the removal, by section 130(3) of the 2002 Act, of the former requirement in section 39(2)(b) that a qualifying tenant must have occupied the relevant flat as his home for at least three of the 10 years immediately preceding the date he serves his notice.

This last point merits a little further discussion. Until the removal of the residence requirement in section 39(2)(b), a lessee could only claim the benefit of Chapter II at any one time, in respect of a maximum of three flats every 10 years. If a lessee of a block of flats can now claim the benefit of the Chapter in respect of all the flats at the same time, it is only the consequence of the removal of the residence requirement. The fact that an amendment of a provision in a statute has what may be (and it is no more than "may be") an unintended consequence is not of itself a sufficient reason for changing the meaning of another unamended provision in the statute. It would, of course, be different if it is obvious either that such a change was intended or that such a change is necessary as a result of the amendment.

Accordingly, I do not accept that it is right to approach the various operational points raised on behalf of the respondents with any particular preconception that the legislature would not have envisaged or intended head lessees such as the appellants being able to claim the benefit of Chapter II. With that, I turn to those points.

The respondents' case based on the operation of Chapter II

Basing themselves on the provisions relating to the implementation of a qualifying tenant's claim for a new lease, the respondents raise a number of arguments, which, they say, demonstrate that it cannot have been intended that lessees of blocks of flats, or of premises which include property other than flats, should be able to benefit from the provisions of Chapter II.

First, where the premises comprised in the lease consist of a block of flats or include premises other than flats, it is said that there is no machinery for identifying the precise extent of the flat to be comprised in the new lease. In the "plain vanilla" case, where the demise is solely of a flat, the precise extent of the demised premises will be identified by reference to the terms of the lessee's current lease, and this would also apply where the demise is of a number of flats, and no other property. On the other hand, where, as here, a whole building, including, for instance, common parts and a parking area, are included in the demise, the precise extent of the flat to be a subject of the new lease is unclear. Thus, there is nothing in Chapter II to indicate what part, if any, of the external walls of the flat are to be included in the demise.

In my view, the provisions of section 57(1)(a), quoted in para [15] above, are perfectly well able to cover the precise identification of the premises to be comprised in the new lease. So far as the language of the section is concerned, Millett L J said in Cadogan v McGirk [1996] 4 All ER 643, 647f-h:

"[T]he expression 'the terms of the lease' would ordinarily refer to the covenants and conditions of the lease rather than the extent of the demise. But s 57 (1) provides for the terms of the existing lease to be modified (inter alia) to exclude from the new lease property included in the existing lease but not forming part of the flat. This is an indication that the expression 'terms of the existing lease' may need to be given a wider interpretation than would be usual".

Although he immediately went on to say that it was unnecessary to decide the point in that case, it is now necessary to do so. I have no hesitation in concluding that, in the context of section 57(1) the expression "the terms of the lease" is apt to cover the extent of the demised premises to be comprised in the lease. As Millett LJ said, although the primary meaning of the expression may be more narrow, it is quite capable of having a wider meaning, and there is good reason for concluding that it does in section 57(1), for the reason he gave.

There is also nothing in the point that the exercise inherent in identifying the precise boundaries of the flat to be comprised in the new lease is difficult, and cannot have been envisaged by the legislature. LVT members have the ability, experience, and qualifications to consider and determine such issues. (In fact, it may well be that the problem is largely solved in most cases, so far as the structure and exterior of the building is concerned, by consideration of the repairing obligations - see the discussion in para 63 below).

Quite apart from this, such an exercise is on any view required under the provisions of Chapter I. The effect of Part III of Schedule 9 is that, where the lessees of a block of flats exercise the right to enfranchise, the freeholder has the right to a lease back of "any unit…which is not…a flat let to a person who is a qualifying tenant of it" (para 5). Accordingly, where such a unit is not subject to any tenancy, it will be necessary to identify its precise boundaries, either by agreement or through the LVT.

That leads me to the second point relied on by the respondents, namely that section 57(1)(a) could not have been intended to apply to a flat which was included in a lease of a block of flats. If, as would be the case if these appeals succeeded, a head lessee of a block could be a "qualifying tenant" of a flat, the LVT would be drafting the new lease almost from scratch, which would not be the case if qualifying tenants were limited to those who had leases of a flat or only of flats. I accept that the covenants and other terms in a lease of a flat, or even in a lease of several flats, would be, at least normally, relatively easy to transfer, without substantial alterations, into a new lease granted pursuant to Chapter II, whereas more considerable alterations would be likely to be needed on translating the terms of a lease of a block of flats into a new lease of a flat.

However, I do not accept the argument that such alterations would be outside the normal meaning of "modification", either because they would involve additions or because they could be fairly radical. Nor do I accept that it would represent an extraordinary task for LVT members, who are frequently faced with ticklish conveyancing and valuation problems, as perusal of their decisions since January 2003 (available on their website) demonstrates. In many cases, indeed I expect most cases, the premises demised by such head leases will include flats subject to qualifying underleases whose terms will provide very good guidance to the LVT as to the terms to be included in the new lease of a flat to be granted to the head lessee. In cases where no such guidance is available, I have no doubt that members of the LVT will be able to rely on their own expertise and experience, as well as the assistance afforded to them by the parties. Indeed, section 91(9), mentioned in para 19 above, supports the view that the legislature envisaged the LVT performing just such a function.

It was said that the contention that section 57(1)(a) gives such relatively wide powers to the LVT in cases such as the present conflicts with other provisions of that section. I do not agree. Section 57(2) specifically envisages the LVT imposing service charge provisions in a new lease (in circumstances not covered by section 57(1)): that supports the notion that the section was intended to enable the LVT, when settling the terms of the new lease, to add terms of some significance and potential complexity to those of the existing lease. Section 57(6) also indicates that the LVT was intended to have relatively wide powers, often involving sophisticated judgment. Further, despite submissions to the contrary on behalf of the respondents, I do not see how section 57(8A), (9) or (10) assist in the present connection.

The respondents also point out that Chapter II contains no detailed guidance as to the terms of the new lease, in contrast with the provisions relating to a lease back of a unit pursuant to Chapter I. By paragraph 7 of Schedule 9, the terms of such a lease back are to be those set out in Part IV of the Schedule "except to the extent that any departure" is either agreed or ordered by the LVT, who should only make such an order if it is "reasonable in the circumstances". Part IV contains provisions relating to rights to be granted and reserved, and covenants to be entered into by lessor and lessee. In my view, this is not a good point. There is no such guidance in relation to the new lease to be granted under Chapter II because a lessee (even one whose demise consists of a block of flats) making a claim under Chapter II will have a lease which, as section 57(1) expressly acknowledges, should form the template on which the terms of any new lease are based. On the other hand, a freeholder getting a lease back in accordance with Schedule 9 will have no existing lease, and therefore needs some sort of template, such as that set out in Part IV of Schedule 9, on which to base the terms of his lease back.

A number of arguments raised by the respondents rely on the fact that, if a head lessee of a block of flats can claim the benefit of Chapter II in respect of a flat, then, on the grant of the new lease of the flat to him, there would be a deemed determination of the head lease, in so far as it relates to the flat concerned. It is accepted that the words "in substitution for the existing lease" in section 56(1)(a), quoted in para 14 above, can properly be read in subject to the words "in so far as it relates to the flat". That must be right, not only as a matter of language, but also because a lessee whose demise includes a number of flats could be entitled to Chapter II rights in respect of one or more of those flats; thus a determination of a lease as to part only of the demised premises must be envisaged by section 56(1)(a).

However, the respondents' third argument is that it would be somewhat surprising and inconvenient if a lessee of a block of flats could bring about the determination of his lease only in so far as it relates to a particular flat. It would lead to be what has been referred to as a "patchwork" of ownership, in the sense that, after the grant of the new lease, the freehold of the block would be subject to two immediate derivative interests, the new lease of the flat and the original head lease extending to the whole block other than the particular flat. In itself, this is no more than an unusual result, albeit that it is unattractive to a freeholder, but it is far from absurd or capricious. Its unusual aspect is mitigated when one takes into account the consequences of an under-lessee of an individual flat exercising his Chapter II rights: in most cases, the new lease of the flat will extend beyond the term of the head lease, so that, in due course, the freeholder will find himself "landed" with a block of flats, some, possibly all, of which are subject to new leases, and some of which may well be let to the former head lessee.

It is also said that the consequence of a lessee of a block of flats being able to acquire a new lease of each flat in the block (as in Maurice) could be to convert the head lease into a "rump", consisting of the common parts, and (possibly) the exterior and structure of the building. Such an interest, it is said, could have no, or even negative, value, and could carry no incentive to the head lessee to perform his covenants. That may well happen in some cases, and, where it does, it would be unattractive to the freeholder. However, it is not a point which is nearly powerful enough to justify reading a qualification into the 1993 Act of the sort for which either respondent contends. At worst, the freeholder could forfeit the "rump" of the head lease, which (assuming the lessees under the new leases did not need, or obtained, relief from forfeiture) would merely accelerate the leasehold structure which would arise when the head lease came to an end by effluxion of time.

The respondents' fourth point relies on the fact that the 1993 Act does not make any provision for apportionment of covenants or rent if part of the head lease is determined, on the grant of a new lease of a flat. Miss Jackson and Mr Rainey accept that there is not much in this point, because, on any view, there would be a need for apportionment in the case of a lease demising a number of flats, where the lessee is, in principle, entitled to Chapter II rights in respect of one or more of those flats. In any event, I do not see any problem with regard to apportionment of covenants. If a head lease is determined insofar as it relates to a particular flat, the covenants in the head lease will cease to apply to that flat, and the covenants which will apply to that flat will be those contained in the new lease.

It is strictly unnecessary to decide whether, given that part of the head lease will be determined by virtue of section 56(1)(a), there should be an apportionment of the rent under the head lease. However, as the point has been fully debated, it is sensible to do so. Given that it appears to be common ground that there should be apportionment of the covenants, it would appear inconsistent that there should be no apportionment of the rent. Whether that is right or not, in my view there should an apportionment of the rent. Although section 56(1)(a) refers to "substitution" and does not specifically state that there is a surrender of the head lease insofar as it relates to the flat, it seems to me that, as a matter of property law, there must be. The word "substitution" in section 56(1)(a) is a simple way of describing in one word the surrender of the head lease in so far as it relates to the flat, and it is not inconsistent with the notion that there is a surrender of the old lease, at least as in so far as it relates to the flat. Any doubt on the point is put to rest by the specific reference to "surrender" in section 58(4), quoted in para 17 above.

Once it is established that there is a surrender of part of the property comprised in the head lease, the application of normal principles leads to the conclusion that there should be an apportionment of the rent. The point is most simply made by reference to para 7.119 of Woodfall's Law of Landlord and Tenant, looseleaf ed, where it is stated that "a rent is apportionable in respect of estate at common law" and that "the rent will be apportioned" in various specified circumstances, the first of which is "the tenant surrenders part of the land to the landlord". In most cases under Chapter II, the apportionment should be agreed, but if it is not, it seems to me that it could be decided by the LVT under section 91(2)(e), referred to in para 19 above, but, as that aspect was not debated before your Lordships, it would be wrong to express a concluded view. However, if the LVT could not effect the apportionment, it would have to be decided by the court.

The respondents' fifth argument is that, if a head lessee such as one of the instant appellants could acquire a new lease of a flat, it could contain no right over the common parts (or similar rights) because (a) the common parts will be in the possession of the head lessee (at least until the determination of the head lease) and, as the grantee of the new lease of the flat will be the head lessee, he cannot be granted rights against himself, and (b) there is nothing in Chapter II which would enables the terms of the head lease to be varied (other than the part-surrender provided for by section 56) . That may well be true, but it should not lead to any difficulties. There is no need for the grantee of the new lease to be granted any rights over the common parts so long as the head lease continues, because, albeit in a different capacity, namely as lessee of the whole block, he will be in possession of the common parts. The new lease should, of course, contain rights over the common parts and similar rights which will become enforceable once the head lease expires.

The respondents argue that this is not good enough, as, having been granted a new lease of the flat, the head lessee may wish to assign it to a third party, who would not have rights over the common parts until the head lease expires. Apart from the slightly cheap point that this would be a problem which the head lessee had voluntarily brought on himself, there are practical solutions. The head lessee could grant the third party an underlease (for the term of the new lease less a day) of the flat, which could contain rights over the common parts, or he could assign the new lease to a third party under a deed which grants the third party rights over the common parts for the term of the head lease.

The sixth argument raised by the respondents relates to difficulties with regard to services and service charges. The normal scheme, before Chapter II is invoked, (reflected in both these cases) would be as follows. The freeholder would grant a full repairing lease of the building to the head lessee, and the head lessee would then grant underleases of individual units on terms that he would repair the structure and exterior of the building and the under-lessees would pay service charges. If the head lessee can acquire a new lease of a flat, it is said that the integrity and simplicity of this structure falls away unsatisfactorily, particularly from the freeholder's point of view.

That need not be so. As with rights over common parts, the position can effectively be considered by reference to two periods. Once the head lease has expired, the new lease would presumably normally provide that the freeholder should repair the structure and exterior of the building, and that the lessee should be responsible for an appropriate service charge. Until the head lease expires, it seems to me likely that the new lease, at least in the normal case, would, as suggested by my noble and learned friend Lord Hoffmann during argument, place no repairing obligations on the freeholder, with the lessee having no service charge liabilities. For the freeholder to be responsible for repairing the structure and exterior under the new lease would risk impracticality and circuity.

As to impracticality, the freeholder would often have no rights, whether under the head lease or otherwise, to obtain access to carry out repairs to the structure or exterior. It would also seem a little unreal for the freeholder to take on liability to the head lessee, as lessee under the new lease, to repair the whole or any part of the structure and exterior, while he still retains the benefit of a covenant from the head lessee under the head lease to do precisely that work. If the structure and exterior fell out of repair, and the head lessee, in his capacity as lessee under the new lease, could sue the freeholder, the freeholder could meet the claim by countersuing the head lessee for failing to keep the structure and exterior in repair pursuant to the terms of the head lease.

However, while I believe that what I have suggested in para 60 above would generally be the right course, there could no doubt be circumstances where the freeholder was prepared, or even keen, to take on immediate repairing obligations under the new lease, or where, because of special facts, the LVT considered it appropriate that the new lease contained such obligations on the part of the freeholder. As I have already mentioned, the factual circumstances which can arise in relation to claims under the 1993 Act are multifarious and unpredictable, and LVT members have proved themselves expert and adept at dealing with those problems. A wide discretion has been accorded to the LVT by the legislature under provisions such as section 57, and it seems to me, in agreement with what was said during argument by my noble and learned friend Lord Walker of Gestingthorpe, that it would be wrong to suggest that there is a single principle of general application on this issue.

(Having said that, it is right to add that what I have suggested as the generally correct approach assumes that the extent of the demise under the new lease will not include the structure or external walls of the flat, as otherwise they would be taken out of the head lease, and hence, I think, out of the head lessee's obligations to the freeholder. This would not of course prevent the internal skin of those walls, and appropriate rights, such as affixing of picture hooks, light-fittings etc, on those walls, being included in the new lease. If the new lease included the external and structural walls of the flat, the consequence would appear to be that the head lessee was no longer responsible for the repair of the external and structural walls so far as they were included in the flat. This would be inconvenient, particularly to the freeholder, but I do not believe that it need prove a real problem. The new lease could impose the liability for the external walls and structure of the flat on the lessee until the head lease expires. This would mean that the head lessee was responsible to the freeholder for the repair of all the external walls and structure, albeit under a combination of the head lease and any new lease.)

A seventh argument raised by the respondents is that difficulties could arise if a new lease were granted in cases, such as the present, where the premises demised by the head lease include an area for parking. Where the lessee of a single flat seeks a new lease, the parking rights granted in the new lease would, at least in the absence of agreement to the contrary or special facts justifying a departure, be the same as those contained in his current lease. However, it cannot be right that, on exercising his Chapter II rights in respect of a single flat, a head lessee could obtain the same right over the car parking area as he has under the head lease, namely inclusion of that area in his demise.

In my judgment, this argument raises no insuperable problem. The rights to be granted under any new lease include any "appurtenances belonging to, or usually enjoyed with, the flat and let to the tenant with the flat" - see section 62(2), quoted in para 18 above. If the person concerned is the lessee of a block of flats, then, where the parking area is used by the occupiers of flats in the block (as would usually be the case), it will be necessary to inquire what rights the particular flat enjoys in respect of that area. Sometimes, the area will be marked out so that each flat has its own particular allotted space, in which case the right to park in that space would no doubt, at least frequently, be granted with the new lease. In other cases, there may be a more informal arrangement such as a right for the occupier of each flat to park a vehicle within the area. In such a case, the new lease would carry a right to park in the area (no doubt subject to appropriate limitations and qualifications as the LVT thought fit). As Millett LJ said in Cadogan v McGirk [1996] 4 All ER 643, 651j, "Parliament cannot sensibly have intended to distinguish between a right to make use of a storage or other space and an actual demise of the space".

Eighthly, the respondents argued that it would lead to anomalies under Chapter I if a lessee of a block of flats could be a "qualifying tenant", given that the definition appears to be the same for both Chapters. On the basis of the arguments presented in this case, it appears to me that there is at least a real possibility that anomalies could arise under Chapter I whether or not such a lessee can be a qualifying tenant of a flat. In summary, the possible anomalies are these. If a lessee of the block cannot be a qualifying tenant, then, on a collective enfranchisement, there could be severance of the head lease in respect of flats not subject to qualifying underleases, and exclusion of any caretaker's flat from the collective purchase. On the other hand, if such a lessee can be a qualifying tenant, there is the possible anomaly identified in Hague on Leasehold Enfranchisement, 4th ed (2007), para 20-08.

I am reluctant to add to what is already a long and technical opinion by discussing issues which do not need to be decided, and which would be more appropriately resolved when they arise directly. If the appellants' case led to startling consequences in relation to Chapter I, and that of the respondents did not, that would be a point worth considering even in a case purely concerned with Chapter II. However, I do not consider that these competing anomalies need further consideration in this case. Having briefly identified the alleged anomalies, it suffices for present purposes to say that I am satisfied that the balance of alleged anomaly in relation to Chapter I does not lie in favour, let alone strongly in favour, of the respondents' case.

Finally, the respondents argue that article 1 of the First Protocol to the European Convention of Human Rights would be infringed if a head lessee could be a "qualifying tenant" of a flat for the purposes of Chapter II. I am wholly unpersuaded by that point, which has two limbs, compensation and certainty.

As to compensation, it is clear that, whatever loss the freeholder may suffer as a result of a head lessee being able to acquire a new lease should be close to fully compensated under Schedule 13, referred to in para 21 above. In particular, insofar as the interest of the freeholder is diminished due to the sorts of factors which I have been considering, it seems clear that he would be entitled to compensation in accordance with the provisions of para 5(2) of the Schedule. Given the decision of the Strasbourg Court in James v United Kingdom (1986) 8 EHRR 123, the respondents rightly accept that there is no basis for complaining about the statutory measure of compensation.

However, it is said that a freeholder might not be able to assess with any precision the amount of compensation which he should be accorded, particularly if he did not know the terms of the new lease, when he serves his counter-notice, for which he has two months under section 42(3)(f) - see para 12 above. Given that he has to include a proposed figure for compensation in his counter-notice, this is said to be unfair, or at least an indication that the appellants' case is wrong. I do not think that there is anything in this point. It is quite plain that, in his counter-notice, a landlord does not have to include a precise figure as to the level of compensation he is seeking. It is very common, to say the least, for a party who has to specify a figure in a notice to quote something more favourable then he expects to get. It is true that, in Cadogan Estates LA v Morris [1998] EWCA Civ 1671, [1999] 1 EGLR 59, the Court of Appeal held that, where a tenant had included a figure that he could not reasonably have expected to achieve in his notice under section 42, the notice was invalid. Assuming that that decision was correct, it seems to me plainly distinguishable, as was recognised in the subsequent Court of Appeal decision of 9 Cornwall Crescent London Ltd v Kensington and Chelsea RLBC [2005] EWCA Civ 324, [2006] 1 WLR 1186. Unlike in the case of a landlord's counter-notice under section 45, the terms proposed in a tenant's notice under section 42 can, if the landlord fails to serve a counter-notice, become binding - see section 49(1), referred to in para 13 above.

It was also suggested that the terms of section 57 are too vague to satisfy the requirement of legality in article 1 of the First Protocol. At para 62 in the Court of Appeal, Arden LJ expressed some doubt on this point, in the light of the principle enunciated by Lord Hope of Craighead in R (Gillan) v Comr of Police of the Metropolis [2006] 2 AC 307, para 52, namely that "any restrictions on the rights and freedoms of the individual must be prescribed by law in a way that is sufficiently accessible and sufficiently precise to enable the individual to foresee the consequences".

In my judgment, the provisions of section 57 fully satisfy the requirement. It is inevitable that provisions of this sort are expressed in relatively general terms, because, as already mentioned, they have to apply in all sorts of different circumstances, many of which are very difficult, and even impossible, to foresee. The obviously sensible course, which has been adopted by the legislature, is to leave the sort of issues with which section 57 is concerned to the good sense of the LVT, always remembering that whatever loss a freeholder or other lessor suffers as a result of a lessee exercising his Chapter II right, is liable to be compensated pursuant to the provisions of Schedule 13.

Conclusion

In summary, my conclusions are as follows:

(a) As a matter of statutory language, it appears clear that a lessee under a lease of property which includes a flat can be a "tenant" of that flat for the purposes of Chapter II of Part I of the 1993 Act, irrespective of the nature or extent of the other property included in the demise.

(b) In particular, there is no reason to exclude a lessee under a lease of a block of flats, or a lease which includes property other than flats, from being a "tenant of a flat" for the purposes of Chapter II of Part I of the 1993 Act.

(d) Nor is there a good argument to the contrary based on the alleged practical difficulties, inconsistencies or oddities resulting from this conclusion.

Accordingly, I would allow both these appeals, and restore the order of the first instance judges in each case.