Cadogan Estates Ltd v Morris [1998] EWCA Civ 1671 (4 November 1998)

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1. This is an appeal from an order of Mr Recorder Kallipetis QC made on 21 January 1998 in the West London County Court whereby he upheld the validity of the tenant’s notice served under the provisions of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act). At the hearing below the respondent, who I shall refer to as the tenant, challenged the jurisdiction of the court to determine the validity of the notice. The Recorder held that he had jurisdiction and there is no cross-appeal.

2. The facts were not in dispute. In June 1990 the tenant took an assignment of the residue of a 30 year lease of Flat 32, 5 Sloane Court East, London SW3 (the flat). The contractual term was due to expire on 22 December 1994. The tenant served the notice pursuant to s.42 of the Act on 6 September 1994. The notice specified that the premium that the tenant proposed to pay for the grant of a new lease was £100. The appellants, who I shall refer to as the landlord, while not accepting the validity of the tenant’s notice, served a counter-notice.

3. The tenant inserted the figure £100 knowing that it was a ‘formal nominal figure’ having been professionally advised that this was acceptable. It was a deliberate decision. The figure bore no relation to the realistic figure, which lay probably between £100,000 and £300,000. The claim is for a 90 year lease from 23 December 1994 at a peppercorn rent (s56 and Schedule 13 of the Act). It is obvious therefore that any premium will be very substantial.

4. The Act gives qualifying tenants, essentially those holding a long lease at a low rent, two important rights. Chapter 1 of Part 1 introduced the right to collective enfranchisement, namely the right of a sufficient majority of tenants to acquire the freehold. Chapter II of Part 1 granted a qualifying tenant an individual right to a new lease (s39(1)). The new lease is in substitution for the old lease. The value of the new lease will vary depending to a considerable extent on how much of the old lease remains unexpired. If the existing lease has a long time to run, then the premium payable may be quite small. But if, as in this case, the old lease is nearly expired, what is being purchased is 90 years at a peppercorn rent. Something which is clearly very valuable.

(iii) such further particulars as are necessary to show that the tenant’s lease is, in accordance with section 8 ((as that Section applies in accordance with 39(3)), a lease at a low rent [or, in accordance with section 8A (as that section so applies), a lease for a particularly long term], and

(c) specify the premium which the tenant proposes to pay in respect of the grant of a new lease under this Chapter and, where any other amount will be payable by him in accordance with any provision of Schedule 13, the amount which he proposes to pay in accordance with that provision;

6. S.45 provides that the landlord can serve a counter-notice, provided he does so within the time specified in the tenant’s notice. The counter-notice must state whether the landlord admits that the tenant qualifies for the right to acquire a new lease or does not admit that right, or that the landlord proposes to redevelop. If he admits the tenant’s right, his counter-notice must specify which of the tenant’s proposals are accepted and, in relation to any proposal not accepted, specify the landlord’s counter-proposals (s.45(2) & (3).

7. S.49(1) provides that where a counter-notice has not been served in accordance with s.45(1) the court may, on application by the tenant, make an order determining, in accordance with the proposals contained in the tenant’s notice, the terms of the acquisition. We are told by counsel that there has been a difference of view among County Court judges as to whether the court is bound to grant a new lease on the terms of the tenant’s proposals, if the landlord fails to serve a counter-notice in time; or whether it has a discretion. Mr Cowen, counsel for the tenant, submitted that the court was obliged to do so and had no discretion. It is unnecessary for this court to resolve that question. Suffice it to say that if Mr Cowen is right, should the landlord for whatever reason fail to serve a counter-notice in time, he will find himself granting a 90 year lease at a peppercorn rent for £100 - if Mr Cowen’s main contention in this appeal is correct.

8. The Leasehold Reform (Collective Enfranchisement and Lease Renewal) Regulations 1993. S1.No.2407 (the Regulations) were made pursuant to s.98 of the Act. Schedule 2 is concerned with lease renewals. Paragraph 2(1) provides that the landlord may give the tenant notice requiring payment of a deposit at any time when the tenant’s notice continues in force. By paragraph 2(2) the amount of the deposit is £250 or 10% of the amount proposed in the tenant’s notice payable on the grant of the lease in accordance with Schedule 13 - whichever is the greater. By paragraph 3(3) if the deposit has to be returned to the tenant the landlord is entitled to deduct his costs as prescribed under s.60 of the Act. These costs can be substantial, including the cost of obtaining a valuation of the tenant’s flat for the purpose of fixing the premium. This is a valuable right to the landlord, because we are told by counsel that not infrequently the tenant, for one reason or another, does not continue with the claim.

It was submitted to the Recorder by Mr Cowen, and also to this court as an alternative to his principle argument on construction, to which I shall come shortly, that if the £100 proposal did not satisfy s.42(3)(c), it was an inaccuracy in the particulars and was therefore cured under this paragraph. It is not entirely clear whether the Recorder accepted this submission. There is considerable discussion in his judgment as to whether it amounted to an inaccuracy or an omission. In my judgment paragraph 9(1) has no application to s.42(3)(c) or indeed any of the other requirements of s.43(3) other than those which are specifically called particulars, that is to say those in s.43(3)(b). This is so as a matter of ordinary construction, quite apart from the fact that in my view the expression inaccuracy is hardly appropriate to be used in relation to what must be specified or stated in subparagraph (c)-(f) of s.43(3).

11. The notice is the start of the procedure, which ideally will lead to the parties agreeing the terms of the new lease. The Act is designed to encourage parties to reach an agreement and, if they do so, time and money is saved. Only in default of agreement does the matter have to be determined by the Leasehold Valuation Tribunal. If a realistic offer is made at the outset, the landlord can accept it, without spending time and expense on valuations or negotiations. And the fact that he may recover most of these costs from the tenant under s.60, does not alter the policy of the Act. We are told by Mr Radevsky that not infrequently when tenants realise what they are going to have to pay for the new lease, they no longer wish to continue. It is better from everyone’s point of view that this should be realised at the outset, with consequent saving of costs.

12. The process is one of compulsory purchase if the tenant is able and willing to do so. Effectively the landlord is compelled to offer the new lease for sale to the tenant, if he qualifies. In the same way as in any other transaction of purchase and sale, the purchaser should make a realistic offer, though not necessarily his final offer.

13. The sum proposed by the tenant by way of premium determines the amount of the deposit. While it is not permissible to construe primary legislation in the light of subordinate legislation, it seems to me that the provision in the regulations relating to deposits would be effectively negated if Mr Cowen is right. No-one will ever pay a deposit of more than £250. This is a valuable right to the landlord. Although of course he may have other remedies for recovering his Section 60 costs, it can be very difficult in the case of a tenant who has gone out of possession; it may not be worth the trouble and expense of pursuing him for a few thousand pounds.

14. It is at least arguable that s.49(1) has the effect that the court must grant a new lease in accordance with the tenant’s proposals set out in the notice. It would be a very harsh result if for whatever reason the landlord failed to serve a counter-notice in what is a very short time span, to find that he had to grant a 90 years lease for virtually nothing.

15. Mr Cowen submits that there is no warrant for introducing some such words as bona fide and genuine into s.43(3)(c). The purpose of the provisions is merely to initiate a process of negotiation, and for this purpose it matters not whether a nominal or realistic figure is proposed. He also submitted that if the appellant’s contention was correct the County Court would be beset with the difficult question of assessing whether the proposal was genuine and realistic or not. Suppose for example the tenant in this case put forward £50,000, knowing that at the end of the day he might well have to go to something like £200,000; would that be sufficient? This was an argument that weighed heavily with the Recorder, indeed as I understand it, it was the decisive consideration. Mr Cowen also contended that valuation was the province of the Leasehold Valuation Tribunal, and if the court had to determine whether or not the offer was realistic, it would in some way encroach on the Tribunal’s jurisdiction or the court might have to refer the case to the Tribunal for a preliminary opinion.

16. Finally, Mr Cowen contrasted the provisions of s.42 with the corresponding provisions of s.13 which deal with the question of collective enfranchisement and notice to be given by those proposing to purchase. As originally drafted s.13 contained a subsection which required that a notice should not be given unless the qualifying tenants had obtained a valuation prepared by a qualified surveyor of the relevant interests and the notice had to specify that this was done and the name of the surveyor (s.13(6)). Mr Cowen contended that this indicated, by contrast with s.42, that the proposed purchase price which had to be specified (s.13(3)(d)), was to be a realistic and genuine one. Quite apart from the fact that subsection (6) of Section 13 was subsequently repealed in the Housing Act 1996, the conclusion does not in my view follow from the premise. Parliament may have thought there were good reasons for requiring a valuation to be obtained in the case of collective enfranchisement, not least because the valuation is likely to be very substantial, whereas in the case of a lease renewal, for reasons I have already explained, it may not always be so. But if s.13(3)(d) requires a bona fide and genuine proposal as to a purchase price, as Mr Cowen concedes, I cannot see why the same should not apply to s.42(3)(c).

17. I do not consider it is necessary to read any words into s.42(3)(c). The tenant is required to specify the premium that he proposes to pay. He did not do so; he deliberately specified a figure which he did not propose to pay. I do not think the tenant is required to offer his final figure which he may be prepared to go to, but he should in my view offer a realistic figure. The judge was troubled by the difficulty in telling whether the offer was a realistic one. I very much doubt whether in practice this will prevent the difficulties that the judge envisaged. It ought to be possible both for the landlord and the judge to recognise whether the offer is a realistic one or simply a nominal or wholly unrealistic one. The landlord would need to be on fairly firm ground if he sought to challenge a substantial offer, even if he thought it was considerably too low. The court will obviously allow a fairly wide margin. If the landlord unsuccessfully challenges the validity of the notice, he will find himself paying the costs. On the other hand, even if it is the tenant’s opening bid, it should in my view be a realistic one. I decline to lay down any more precise guidelines. In this I follow what Sir John Donaldson MR said in Cresswell v Duke of Westminster [1985] 2 EGLR 151 at 152:

This seems to me to be an application of the well known elephant test. It is difficult to describe, but you know it when you see it. I think we can trust to the good sense of landlords not to make frivolous applications and County Court judges to take a robust line and not get enmeshed in hearing detailed evidence. A brief enquiry, if necessary with limited evidence from tenant and landlord should suffice.

18. I also consider that when the landlord makes counter proposals in his counter-notice (see s.45(3)(b)) this too should be a realistic figure and not an absurdly high one, which might have the effect of intimidating the tenant. If the landlord does not give a valid counter-notice in the time allowed, the consequences in s.49(1) will result. But here again there is no reason why the landlord should not specify the highest figure that he realistically hopes to get.

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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Cadogan Estates Ltd v Morris [1998] EWCA Civ 1671 (4 November 1998) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1998/1671.html Cite as: [1999] 1 EGLR 59, [1998] EWCA Civ 1671

England and Wales Court of Appeal (Civil Division) Decisions