UT Neutral citation number: [2012] UKUT 310 (LC)

Case Number: LRA/90/2011

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LEASEHOLD ENFRANCHISEMENT –ground rent – rent review – section 78 Housing Act 1980

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE

LEASEHOLD VALUATION TRIBUNAL

BETWEEN:

SINCLAIR GARDENS INVESTMENTS Appellant

(KENSINGTON) LIMITED

and

31 CROYDON ROAD LIMITED Respondent

Re: Block of Flats,

31 Croydon Road,

Reigate,

Surrey RH2 OLZ

Before: His Honour Judge Gerald

Sitting at: 43-45 Bedford Square, London WC1B 3AS

on 5 September 2012

Oliver Radley-Gardner instructed for the appellant

The respondent did not appear and was not represented.

The following cases are referred to in this decision:

Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (HL)

United Scientific Holdings Burnley Borough Council Burnley Borough Council [1978] AC 904

British Gas Corporation v Universities Superannuation Scheme Limited [1986] 1 WLR 398

Rainy Sky SA v Kookim Bank [2011] UKSC 50

DECISION

Introduction

1.           The Appellant landlord appeals against the decision (“the Decision”) of the Leasehold Valuation Tribunal (“LVT”) made on 18^th May 2011 on the construction of the proviso to the rent review provisions contained in clause 5 of the common-form 99 year leases of five flats comprised in the building situate at 31 Croydon Road, Reigate.

2.           The Respondent, being the nominee purchaser of the five tenants exercising their rights to enfranchise by acquisition of the freehold reversion, has notified the Upper Tribunal that it opposes the appeal but does not propose to appear being content to rely upon the reasoning contained in the Decision.

3.           However, although not legally represented, two tenant-shareholders of the Respondent, Ms Susan Batt and Ms Amanda Moray, did attend to observe the hearing along with their valuer Roger Nelson. They were invited to make submissions but did not wish to add to the reasoning contained in the Decision.

The lease

4.           By clause 1 of the sample lease dated 8^th March 1985 (“the Lease”) the tenant covenants to pay the annual rents mentioned in clause 5 which provides as follows (italics supplied):

The LVT decision

5.           The LVT held that the proviso to clause 5 operated as a permanent cap on the level of rent, thereby rejecting the Appellant’s submission that it only operated as a cap so long as section 78 of the Housing Act 1980 (“the 1980 Act”) remained in force, it now being spent following the repeal of those provisions so far as they affect the Lease.

6.           The reasoning of the LVT is to be found in paragraph 47 of the Decision:

“The Tribunal carefully considered the legal submissions made on behalf of both parties. The words identifying the reason for the capping are purely there for guidance and were relevant at the time the lease was drawn. It is clear to the Tribunal that the draughtsman was intending to avoid the lease coming within the restrictions of the Rent Act 1977 as there is specific reference to two-thirds rateable value, the same wording that is used in the Rent Act. The clause would overall have equal effect whether or not the words relating to S.78 were present or not and it is quite clear that the capping provision does not fall away just because the particular piece of legislation has been repealed.”

7.           Following the LVT’s decision, the parties’ respective experts agreed that the annual rent payable from the first review would be £521 resulting in the price payable upon enfranchisement being £45,632. If successful, the Appellant’s expert assesses the annual rent payable from the first review at £1,645.47 resulting in an enfranchisement prise of £61,280. That has not however been formally assessed by the LVT and neither has the Respondent adduced evidence in anticipation of the decision of the Upper Tribunal.

Discussion, and decision

8.           The question for determination is whether or not the LVT erred in construing the proviso as being a permanent cap upon the reviewed rent or whether it was intended to operate only so long as the provisions of section 78 of the 1980 Act were in force so that it is not spent.

9.           The principles of construction are now well-established. A lease is to be construed in the factual context reasonably known to the parties; the meaning is that which would be conveyed to a reasonable person in that factual context; words are to be given their natural and ordinary meaning unless a specific meaning is adopted; the object is to construe what the contracting parties intended by the words they have used. In addition to the well known passage of Lord Hoffman in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (HL) cited in the Decision, I was also referred to United Scientific Holdings Burnley Borough Council Burnley Borough Council [1978] AC 904; British Gas Corporation v Universities Superannuation Scheme Limited [1986] 1 WLR 398; and Rainy Sky SA v Kookim Bank [2011] UKSC 50.

10.        It is self-evident from the fact that section 78 is referred at the end of the proviso that the parties, especially the tenant, were keen to ensure that its provisions were complied with failing which it would be illegal to charge a premium on assignment which would not only make the lease a bad investment but also unmortgageable and therefore unsaleable by the original vendor as no-one would pay a premium in such circumstances.

11.        If, as the LVT said, the reference to section 78 was for guidance, or explanation, it would follow that the reference in fact had and was intended to have no contractual or other effect or force. If that were so, it would relegate the words highlighted in italics to something akin to a recital at the commencement of a lease intended to have no contractual force, whereas the words are specifically included at the tail end of a proviso which itself is at the very end of a relatively detailed rent review provision.

12.        This would offend against the usual approach to construction that parties are presumed to have included words contained in the operative part of a lease with the intent that they have contractual effect and force otherwise they would not have been included and would be mere surplusage. Indeed, the reasons or explanations for why parties have included particular contractual provisions are usually irrelevant, and rarely if ever found in the operative parts of a professionally drawn lease such as the Lease.

13.        Had the parties intended that the proviso operate independently of section 78 not only would there have been no reason to refer to section 78 at all, there being no “guidance” required, but it would have been quite unnecessary and would have been partial, referring to only one aspect of inclusion of the proviso (section 78), the other aspect being an agreement and intent that the reviewed rent be permanently capped.

14.        The fact that section 78 is referred to in the way it is in my judgment points strongly towards the conclusion that the sole reason for its inclusion was to ensure statutory compliance and not otherwise. That would also fit with the bulk of clause 5 dealing with the “core” rent review provisions, the proviso being added at the very end in order to ensure statutory compliance if applicable, almost as if the parties had in mind that if section 78 ceased to apply the whole proviso could simply be ignored.

15.        In my judgment, when construed naturally and in context, a reasonable person would conclude that the words were incorporated as part of the proviso not merely by way of guidance, or explanation, but to have contractual force intended to control or confine the operation of the proviso to compliance with section 78 so long as same was required. If, as has happened, section 78 were to be repealed in relation to the subject leases 9as has happened), it no longer needs to be complied with so that the proviso is spent and should be ignored for the remainder of the Lease.

16.        I should say, for completeness, that the fact that rateable values have long-since been abolished does not assist in the construing the parties’ intentions at the time the Lease was granted because that is something which could not have been reasonably contemplated at that time (1985) and was therefore outside of the contemplation of the reasonable person.  By contrast, the proviso specifically contemplates the possibility that section 78 might no longer need to be complied with.

17.        I therefore allow this appeal. The remaining valuation issue is to be remitted for determination by the LVT: it may be determined by the same or a differently composed panel.

Dated 10 September 2012

His Honour Judge Gerald