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Cite as: [2007] UKSPC SPC00648, [2007] UKSPC SPC648

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Elizabeth Court (Bournemouth) Ltd v Revenue & Customs [2007] UKSPC SPC00648 (26 November 2007)

Spc00648

STAMP DUTY LAND TAX – reliefs – collective enfranchisement by leaseholders – whether the chargeable transaction entered into by the Appellant was "a chargeable transaction entered into by an RTE company in pursuance of a right of collective enfranchisement" – no – appeal dismissed – FA 2003 s 74(1)

THE SPECIAL COMMISSIONERS

ELIZABETH COURT (BOURNEMOUTH) LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

SPECIAL COMMISSIONER : DR A N BRICE

Sitting in London on 31 October 2007

David Southern, Counsel, instructed by Laceys Solicitors, for the Appellant

Kate Selway, Counsel, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The appeal

Elizabeth Court (Bournemouth) Limited (the Appellant) appeals against two closure notices issued by The Commissioners for Her Majesty's Revenue and Customs (the Revenue) on 30 January 2006. The first closure notice related to the acquisition by the Appellant of the freehold interest in property known as Elizabeth Court, Bournemouth (Elizabeth Court) and amended the Appellant's land transaction return to indicate that collective enfranchisement relief was not available; that stamp duty land tax was due at the rate of 4%; and that the amount of tax due was £22,100. The second closure notice related to the acquisition by the Appellant of the headlease of Elizabeth Court and indicated that collective enfranchisement relief was not available; that stamp duty land tax was due at the rate of 3%; and that the amount of tax due was £11,025. Thus the Revenue were of the view that the total amount of tax due was £33,125.

The Appellant appealed because it was of the view that it was entitled to collective enfranchisement relief which would reduce the amount of tax payable to nil.

The tax legislation

Part 4 (sections 42 to 124) of the Finance Act 2003 (the 2003 Act) contains the provisions relating to stamp duty land tax. Section 55 provides that the amount of tax chargeable in respect of a chargeable transaction is a percentage of the chargeable consideration for the transaction. In January 2005 the rate for residential transactions was 0% where the relevant consideration was not more than £60,000, 3% where the relevant consideration was more than £250,000 but not more than £500,000, and 4% where the relevant consideration was more than £500,000. Sections 57 to 75 contain the provisions about reliefs.

Section 74 of the 2003 Act contains provisions about collective enfranchisement by leaseholders and the relevant parts provide:

"74. Collective enfranchisement by leaseholders

(1) This section applies where a chargeable transaction is entered into by an RTE company in pursuance of a right of collective enfranchisement.

(2) In that case, the rate of tax is determined by reference to the fraction of the relevant consideration produced by dividing the total amount of that consideration by the number of flats in respect of which the right of collective enfranchisement is being exercised.

(3) The tax chargeable is then determined by applying that rate to the chargeable consideration for the transaction.

(4) In this section –

(a) "RTE company" has the meaning given by section 4A of the Leasehold Reform, Housing and Urban Development Act 1993 (c28);

(b) "right of collective enfranchisement" means the right exercisable by an RTE company under-

(i) Part I of the Landlord and Tenant Act 1987 (c 31), or

(ii) Chapter I of Part I of the Leasehold Reform, Housing and Urban Development Act 1993 (c28); and

(c) "flat" has the same meaning as in the Act conferring the right of collective enfranchisement. "

Section 124 of the 2003 Act provides that Schedule 19 makes provision for the coming into force of the 2003 Act. Paragraph 1(1) of Schedule 19 provides that, subject to the following provisions of the Schedule, the provisions of that Part of the Act come into force on the passing of the Act. The Act was passed on 10 July 2003. Paragraph 2 of Schedule 19 provides that a transaction is not an SDLT transaction unless the effective date of the transaction is on or after the implementation date which means the date appointed by Treasury Order as the implementation date. The Stamp Duty Land Tax (Appointment of Implementation Date) Order 2003 SI 2003 No. 2899 appointed 1 December 2003 as the implementation date.

The issue

It was agreed that the acquisition by the Appellant of the freehold interest and the headlease of Elizabeth Court were chargeable transactions. The Appellant argued that it there should be relief from stamp duty land tax on the ground that it met the conditions in section 74 of the 2003 Act relating to collective enfranchisement by leaseholders. The Revenue argued that the relief was not available to the Appellant who was not an RTE company as defined in section 74(4)(a) and who had not entered into a chargeable transaction in pursuance of a right of collective enfranchisement as defined in section 74(4)(b).

Thus the issue for determination in the appeal is whether, when the Appellant acquired the freehold interest and the headlease of Elizabeth Court, that was a transaction entered into by an RTE company in pursuance of a right of collective enfranchisement within the meaning of section 74(1) of the 2003 Act applying the definitions in section 74(4).

The enfranchisement legislation

Before finding the facts I have found it convenient to summarise the legislation which gives the right of collective enfranchisement.

The 1993 Act

The Leasehold Reform Act 1967 conferred on certain tenants of leasehold houses the right to acquire on fair terms the freehold or an extended lease of the house. A similar right was extended to certain tenants of flats by the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act). Chapter I of the 1993 Act contains the provisions giving the right of collective enfranchisement to tenants of flats. Section 1 of the 1993 Act came into force on 1 November 1993 and the relevant part provides:

"1 The right to collective enfranchisement

(1) This Chapter has effect for the purpose of conferring on qualifying tenants of flats contained in premises to which this Chapter applies … the right, exercisable subject to and in accordance with this Chapter, to have the freehold of those premises acquired on their behalf –

(a) by a person or persons appointed by them for the purpose, and

(b) at a price determined in accordance with this Chapter;

and that right is referred to in this Chapter as "the right to collective enfranchisement."

In section 15 of the 1993 Act the person appointed by the tenants to acquire the freehold of the premises on their behalf is referred to as the nominee purchaser. Section 2 of the 1993 Act provides that, where the right to collective enfranchisement is exercised in relation to any premises, then the qualifying tenants by whom the right is exercised acquire the interest of the tenant under any lease superior to the lease held by the qualifying tenants.

Section 13 of the 1993 Act contains the provisions about exercising the right to collective enfranchisement and the relevant parts provide:

"13. Notice by qualifying tenants of claim to exercise right

(1) A claim to exercise the right to collective enfranchisement with respect to any premises is made by the giving of notice of the claim under this section.

(2) A notice given under this section ("the initial notice") –

(a) must be given to the reversioner in respect of those premises; and

(b) must be given by a number of qualifying tenants of flats contained in the premises as at the relevant date which-

(i) is not less than two-thirds of the total number of such tenants ; and

(ii) is not less than one-half of the total number of flats so contained;

and not less than one-half of the qualifying tenants by whom the notice is given must satisfy the residence condition."

Thus the scheme of the 1993 Act is to give to certain tenants of leasehold flats the right to acquire the freehold and any superior lease of the premises containing the flats. The right has to be exercised by a person appointed for that purpose (called a nominee purchaser) and is exercised by the giving of a notice by a stated majority of the tenants, not less than half of whom have to satisfy a residence condition.

The 2002 Act

Some of the provisions of the 1993 Act were amended by the Commonhold and Leasehold Reform Act 2002 (the 2002 Act) which was enacted on 26 July 2002. Different parts of the Act came into force at different times and some parts are not yet in force.

Part 2 of the 2002 Act contains provisions about leasehold reform and Chapter 2 of Part 2 (sections 114 to 128) contains provisions about the collective enfranchisement by tenants of flats. Section 120 provides that the words in section 13(2)(b) of the 1993 Act which followed paragraph (b) are to be omitted; these are the words which require at least one half of the qualifying tenants by whom the initial notice is given to satisfy the residence condition. The provisions of section 120 came into force on 26 July 2002 after which date the residence condition in section 13(2)(b) no longer applied.

Sections 121 to 125 of the 2002 Act contain provisions about the exercise of the right to collective enfranchisement. The relevant parts of these sections have been enacted but have not yet been brought into force. Section 121 is headed "Right exercisable only by RTE company" and amends section 13 of the 1993 Act. Section 121(2) provides:

"(2) In paragraph (b) of subsection (2), after "given by" insert "a RTE company which has among its participating members"".

The effect of this amendment is to provide that the initial notice under section 13 of the 1993 Act must be given by an RTE company acting on behalf of a stated proportion of tenants and not by a nominee purchaser. The phrase "RTE company" is defined in section 122 of the 2002 Act which provides for the insertion of new sections 4A, 4B and 4C in the 1993 Act.

New section 4A provides that a company is an RTE company in relation to premises if it is a private company limited by guarantee and if its memorandum of association states that its object, or one of its objects, is the exercise of the right to collective establishment with respect to the premises. New section 4B contains provisions about the membership of RTE companies. New section 4C provides that the Secretary of State should, by regulations, make provisions about the content and form of the memorandum of association and articles of association of RTE companies and section 4C(4) provides that a provision of the memorandum or articles of association of an RTE company has no effect to the extent that it is inconsistent with the regulations. In September 2002 the Office of the Deputy Prime Minister published a consultation paper which included a draft memorandum of association and draft articles of association for an RTE company and comments were invited by 31 December 2002. However, the Secretary of State has not yet made regulations about the content and form of the memorandum and articles of association of RTE companies.

Section 123 of the 2002 Act inserts a new section 12A in the 1993 Act which provides that, before making a claim to exercise the right to collective enfranchisement with respect to any premises, an RTE company must give notices of invitation to participate to qualifying tenants of flats in the premises who have not agreed to become participating members of the RTE company. Section 123(2) provides that provisions should also be inserted in section 13 of the 1993 Act to the effect that the initial notice provided for by section 13 may not be given unless each person required to be given a notice of invitation to participate has been given such a notice at least 14 days before.

When these sections of the 2002 Act are brought into force it will be necessary for an RTE company to exercise the right to collective enfranchisement on behalf of the tenants in a block of flats rather than that right being exercised, as now, by a nominee purchaser.

The enfranchisement legislation provides the legislative background to section 74 of the 2003 Act which came into force on 1 December 2003.

The facts

There was a statement of agreed facts and a bundle of documents was also produced. The facts were not disputed

Elizabeth Court is a block of 133 flats. On 3 April 1967 the owner of the freehold granted a long lease (the headlease). The lessee of the headlease then granted leases of the individual flats to what were referred to as the flat owners. In 2003 117 out of 131 of the flat owners decided to acquire the freehold and the headlease under the terms of the 1993 Act as then amended by the 2002 Act. Each flat owner entered into a Participation Agreement with the Appellant and agreed to exercise the right to collective enfranchisement under the 1993 Act and to appoint a company limited by shares with the same name as the Appellant as nominee purchaser. On 9 January 2004 notice of intention to acquire the freehold and long leasehold titles was given to the respective owners by that company as nominee purchaser under the provisions of section 13 of the 1993 Act.

The Appellant was incorporated on 22 December 2004 as a company limited by guarantee. By notice dated 24 December 2004 it replaced the company of the same name but limited by shares as the nominee purchaser. The Appellant's memorandum and articles of association are based on the drafts in the consultation document published by the Office of the Deputy Prime Minister in September 2002. One of the Appellant's objects is to exercise the right to collective enfranchisement of Elizabeth Court. The members of the Appellant are most of the flat owners. (Many of the flat owners did not meet the residence requirement which appears after section 13(2)(b) in the 1993 Act and so initially could not exercise the right of collective enfranchisement given by the 1993 Act. However, after the enactment of section 120 of the 2002 Act (which came into force on 26 July 2002), and the removal of the words containing the residence requirement in section 13(2)(b) of the 1993 Act, those flat owners became entitled to exercise the right of collective enfranchisement.)

By contract dated 21 January 2005 the Appellant agreed to purchase the freehold title of the land upon which the block of flats was built for the price of £552,500 and the benefit of the headlease for the price of £367,500. The contract was completed on the same day.

If, as the Appellant argues, the relief in section 74 of the 2003 Act applies to the transfers to it of the freehold interest and the headlease, then under section 74(2), the rate of stamp duty land tax is determined by dividing the total consideration by the number of flats in respect of which the right of collective enfranchisement was exercised. In such a case the amount of tax payable would be nil. The relief was claimed at the time that the transactions were entered into but at the same time the maximum amount of tax payable was also paid.

The arguments

For the Appellant Mr Southern argued that, at the date of the chargeable transaction, the Appellant met the statutory definition of an RTE company in new section 4A of the 1993 Act. That definition was a referential definition as described in Halsbury's Laws Volume 44(1) paragraph 1390 and Bennion on Statutory Interpretation Third Edition 1997 at 440. Mr Southern also relied upon the doctrine of incorporation by reference as enunciated by Bouvier's Law Dictionary Third Edition 1914, II, 1328 and Bennion at 585 and argued that new section 4A of the 1993 Act operated as part of section 74 of the 2003 Act as from the date that the 2003 Act came into force. Even though section 4A was not then in force it had been enacted and section 74(4) of the 2003 Act deemed it to be already in force. Mr Southern cited Regina v Secretary of State for the Home Department ex parte Fire Brigades Union and Others [1995] 2 AC 513 at 570G for the principle that a statute which had been enacted but not brought into force contained a statement of Parliamentary intention even though it created no enforceable rights. Mr Southern also cited Wilson v Dagnall [1972] 2 All ER 44 at 52d to e for the principle that the courts must loyally give effect to what Parliament has provided as to the date upon which statutes come into operation. He argued that Parliament had intended the stamp duty land tax legislation, which included section 74, to come into force on 1 December 2003.

For the Revenue Ms Selway agreed that section 74 of the 2003 Act was already in force but argued that it did not yet have any effect. She referred to the definition of an RTE company in section 74(4)(a) which provided that the phrase had the "meaning given" by section 4A of the 1993 Act. Section 4A was inserted in the 1993 Act by section 122 of the 2002 Act which was not yet in force and so could not "give" a meaning to an RTE company. Further, as new section 4C was not yet in force no regulations had been made by the Secretary of State and so it was not possible to say whether the memorandum and articles of association of the Appellant were consistent with the regulations of an RTE company. She argued that it was not yet possible for an RTE company to exist and so an RTE company could not exercise the right of collective enfranchisement under the 1993 Act. Ms Selway relied upon Wilson v Dagnall at 52 for the principle that the courts could not give effect to a statute which was not yet in force. She argued that the principles of referential definition and of incorporation by reference only applied to meanings already established in law and so could not be applied to section 4A of the 1993 Act which was not yet established in law. The present Parliamentary intention was that the amendments to the 1993 Act, including the new section 4A, introduced by the 2002 Act were not yet in force.

In reply Mr Southern agreed that it was not yet possible for an RTE company to exist for the purposes of the 1993 Act but it was possible for a company to meet the definition of an RTE company for the purposes of the 2003 Act.

Reasons for Decision

The issue for determination in the appeal is whether, when the Appellant acquired the freehold interest and the headlease of Elizabeth Court, that was "a transaction entered into by an RTE company in pursuance of a right of collective enfranchisement" within the meaning of section 74(1) of the 2003 Act.

From the arguments of the parties it appears that the issue could be approached from two directions; either one could take a narrow, technical view or one could adopt a broader view by reference to the legislative framework as a whole. In reaching a decision I started by adopting the narrow view to see where it led and then stood back and looked at the wider picture bearing in mind that the overriding objective is to try to determine the intention of Parliament.

However, before considering the two approaches I turn to identify the principles which should be applied to the interpretation of a statute which has been enacted but not brought into force. These principles are relevant in this appeal because section 74 of the 2003 Act refers to the 1993 Act as amended by the 2002 Act but some of the relevant amending sections of the 2002 Act are not yet in force.

In Wilson v Dagnall (1972) the issue was whether, in assessing damages in an action by a widow, her prospects of remarriage should be taken into account. Before the enactment of the Law Reform (Miscellaneous Provisions) Act 1971 (the 1971 Act) they had to be taken into account but the 1971 Act provided that they should not be. The plaintiff's husband was killed in 1969 and his widow started an action in 1970. The 1971 Act received Royal Assent on 1 July 1971 but came into operation on 1 August 1971. The plaintiff's action was heard, and judgment was pronounced, on 27 July. The judge did not reduce the damages by reason of the prospect of remarriage because he thought that it would be unjust to do so as the 1971 Act came into operation on the following Monday. The Court of Appeal allowed an appeal. At 52e Megaw LJ stated that the courts must loyally give effect to what Parliament has provided and not seek to give effect to what they might think Parliament ought to have provided; the judge could not lawfully treat the 1971 Act as if it was in force on 27 July when it was not.

In Fire Brigades Union (1995) the Criminal Justice Act 1988 (the 1988 Act) enacted provisions providing for a scheme of compensation for victims of violent crime. The provisions were to come into force on a day to be appointed by the Secretary of State. No such date was appointed and in 1993 the Secretary of State indicated that the provisions would not be brought into force but that the existing non-statutory scheme would be replaced by another non-statutory scheme. The House of Lords held that, although the provisions in the 1988 Act had not been brought into force, the plain intention of Parliament was that the Secretary of State should bring the provisions into force when it was appropriate to do so and he could not lawfully surrender or release the power or exclude its future exercise. At 570H Lord Lloyd of Berwick referred to the sections of the 1988 Act which were to come into force on a day appointed by the Secretary of State and said:

"The mistake … is to treat these sections as if they did not exist. True, they do not have statutory force. But that does not mean that they are writ in water. They contain a statement of Parliamentary intention, even though they create no enforceable rights."