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

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31.  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.

32.  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".

33.  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.

34.  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.

35.  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

36.  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.”

37.  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.

38.  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.

39.  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.

40.  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.

41.  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

42.  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.

43.  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.

44.  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.

45.  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).

46.  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.

47.  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.

48.  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.

49.  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.

50.  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.

51.  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).

52.  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.

53.  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.

54.  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.

55.  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.

56.  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.

57.  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.

58.  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.

59.  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.

60.  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.

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