Cadogan & Anor v Search Guarantees Plc

This is an appeal by Search Guarantees Plc from the judgment of His Honour Judge Levy QC given on 9 January 2004. Permission to appeal was given by the judge.

Since July 1997, the Appellant has been the registered proprietor of a lease of 51-52 Hans Place, London SW1 (“the Premises”) granted on 21 March 1985 for a term of 65 years from 25 March 1984. The freehold reversion is vested in the Respondents, Earl Cadogan and Cadogan Estates Limited. The Premises comprise 6 flats or maisonettes, 5 of which are presently sub-let on short-term tenancies, and a caretaker’s flat. By a Notice dated 17 December 2002, the Appellant applied to the Respondents to acquire the freehold pursuant to s 1 of the Leasehold Reform Act 1967 (“the 1967 Act”). If the landlord intends to object to the enfranchisement, he is required to serve a Notice in Reply.

Since the Respondents did object, on 28 March 2003, they served such a Notice which denied that the Appellant was entitled to enfranchise under s 1 because, so it was said, it did not satisfy the requirements of s 1(1ZB) of the 1967 Act. The Respondents then commenced these proceedings, seeking a declaration that the Appellant was not entitled to enfranchise. The Judge granted the Respondents the declaration they sought at the hearing on 9 January 2004.

Under s 101(3) of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”), a headlessee can be a “qualifying tenant” for the purposes of Chapters 1 and 2 of Part 1 of the 1993 Act. This was held to be the case in Crean Davidson Investments Ltd v Earl Cadogan [1998] 2 EGLR 96 and is agreed to be so by the parties. Under s 39(4) of the 1993 Act, 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. In this case the parties agree that, because the flats in the Premises are sub-let on short term tenancies, the tenant under the headlease, the Appellant, is the “qualifying tenant” of each flat. On the facts of this case, by virtue of the headlease, the Appellant is also the tenant of the whole house. It is because the Appellant is both the tenant of the house and a qualifying tenant of the flats under the 1993 Act that the current dispute has arisen.

S 1(1ZB) of the 1967 Act provides;

“where a flat forming part of a house is let to a person who is a qualifying tenant of the flat for the purposes of Chapter 1 or 2 of Part 1 of the [1993 Act], a tenant of the house does not have any right under this Part of the Act unless, at the relevant time, he has been occupying the house, or any part of it, as his only or main residence (whether or not he has been using it for other purposes)-

(a)

for the last two years; or

(b)

for periods amounting to two years in the last ten years.”

The Respondents’ argument, accepted by the judge, is as follows. All of the flats, each of which is for part of the house, is let to a qualifying tenant, namely the Appellant. Because that is so, the tenant of the house, who is also the Appellant, does not have any right to enfranchise unless it meets the occupancy requirements set by s 1(1ZB). However, it is not in dispute that the Appellant cannot meet this requirement because it is a company; s 37(5) of the 1967 Act provides that a company cannot occupy property as its residence for the purposes of this legislation. It follows that the Appellant has no right to enfranchise.

The Appellant argues that this is not the correct construction of s 1(1ZB). It says that, read purposively, the tenant of the house cannot be the same person as the qualifying tenant. It is inherent in the provision that they are different.

To determine the scope of s 1(1ZB) it is useful to have in mind the legislative history. Until amendment of the 1967 Act, including the introduction of s. 1(1ZA) and 1(1ZB), by s 138(2) of the Commonhold and Leasehold Reform Act 2002 (the “2002 Act”), a tenant of a house who wished to enfranchise under that Act or a tenant of a flat who wanted to obtain an extended lease under Chapter 2 of the 1993 Act had to demonstrate that he had been occupying the premises as his only or main residence or principle home for 3 years. This requirement had two effects. First, in most cases it resolved conflicts between different people who might be interested in enfranchisement of the same premises. Second, it severely restricted the ability of companies to seek enfranchisement because they were incapable of meeting the residency requirements as explained above. They could only seek enfranchisement under the group provisions of Chapter 1 of Part 1 of the 1993 Act. The consequence of this was that landlords used the residency requirement to curtail severely their exposure to successful applications for enfranchisement. So long as they only granted long leaseholds to companies and would only permit assignment to companies, they ensured that the tenant could never be treated as resident in the premises.

The amendments introduced under the 2002 Act largely removed the residency requirement for enfranchisement and thereby allowed company tenants to qualify for enfranchisement.

The 2002 Act introduced s 1(1ZA) and s 1(1ZB). The former is in the following terms:

“Where a house is for the time being let under two or more tenancies, a tenant under any of those tenancies which is superior to that held by any tenant on whom this Part of this Act confers a right does not have any right under this Part of this Act.”

The clear intention of this was to resolve conflicts between different tenants which would have surfaced because of the removal of the residency requirement. The sub-tenant can enfranchise, those higher up the ladder cannot.

Mr Gaunt QC, who appears for the Appellant, argues that the purpose of s 1(1ZB) is likewise to resolve potential conflicts between different tenants at different levels in the chain. Thus the section is dealing with who shall have the right to enfranchise when there is a tenant of the house and also a tenant of a flat forming part of the house, those being different people. He argues that the legislation is clear and accords with this construction.

Alternatively he argues that, if there is any ambiguity, it should be resolved in favour of his construction. In support of this he relies in particular upon the near-contemporaneous Leasehold Reform (Notices) Amendment Regulations, 2002, SI/2002/No1715 (the “2002 Regulations”) which may be relied upon as an aid to construction under the principles set out in Hanlon v The Law Society [1981] AC 124, 193-4. He also relies on a ministerial statement made in Parliament by Lord Falconer when introducing what is now s 1(1ZB). He says that these demonstrate that what was in contemplation was a resolution of the right of enfranchisement between different tenants, just as s 1(1ZA) does. Thus, insofar as material, the notes to the 2002 Regulations state:

“9.

Section 1(1ZA) of the Act … provides that head lessees do not have rights to enfranchise or a lease extension where there exist inferior tenancies which confer on the tenant the right to enfranchise and a lease extension under the Act. Under section 1(1ZB) of the Act, where there exists an inferior long tenancy [as defined in the 1993 Act] of a flat which confers on the tenant the right to enfranchise or a new lease under that Act the head lessee only has the right to enfranchise or a lease extension under the Act where he meets the residence requirement… It is therefore necessary to provide details of any other long tenancies.”

Mr Radevsky, who appears for the Respondents, concedes the purpose of s 1(1ZA), the 2002 Regulations and the ministerial statement indicate that one mischief addressed by the legislation was the resolution of rights of enfranchisement between different tenants at different levels in the chain. He also concedes that that is likely to be the sort of case in which s 1(1ZB) will most frequently be deployed. However he argues that neither the 2002 Regulations nor the Minister explored or considered the full scope of the section. So, they are illustrative of the application of the section in a normal case but are not definitive of its full scope. He also argues that it is not legitimate to have regard to these extraneous aids to construction because the section is not ambiguous. Had the legislature intended only to resolve conflicts between tenants at different levels in a chain of tenancies it could have done so with ease. For example it could have referred to sub-tenants or sub-letting or it could have referred to head leases and inferior leases as the 2002 Regulations do. He also submits that there is nothing surprising in the legislature having retained a residency requirement in the sort of case we are here concerned with. Why should a company, which cannot be a resident for these purposes, be entitled to enfranchise?

I do not accept these arguments. As explained above, one of the purposes of the changes to the 1967 Act effected by the 2002 Act was to change the law so as to allow companies to obtain enfranchisement. To do that the residence requirement was removed from most of the enfranchisement provisions. Since that is so, one has to inquire why, in the special circumstances of s 1(1ZB), the residence requirement is retained. Mr Gaunt’s construction is consistent with a logical purpose to the section, namely to resolve which of two or more people should have the right to seek enfranchisement. In this respect it seeks to achieve a similar result to s 1(1ZA). By contrast, it is difficult to see what purpose would be served were Mr Radevsky’s construction correct. Indeed, as Mr Gaunt points out, were one to accept Mr Radevsky’s construction, it would have the effect that, in a situation like the present one, although the Appellant could not obtain enfranchisement of its interest in the house, it could still obtain extension of each of the leases for all the individual flats of which it is the qualifying tenant. This would mean that it would have longer leases for the flats than it would have for the common parts. Mr Gaunt described such an outcome as bizarre. I agree.

In the result I accept Mr Gaunt’s argument that the reference in s 1(1ZB) to a situation “where a flat forming part of a house is let to a person who is a qualifying tenant of the flat for the purposes of Chapter 1 and 2 of Part 1 of the 1993 Act”, the tenant of the flat is someone other than the tenant of the house. So construed, the section does not apply to the Appellant and, therefore, does not prevent it from obtaining enfranchisement.

This was the only issue raised in the Notice in Reply and argued before the judge. However, very shortly before the appeal came on for hearing, the Respondent served a Respondents’ Notice in which they seek to rely on s 1(1B) of the 1967 Act. This provides:

“This Part of this Act shall not have effect to confer any right on the tenant of a house under a tenancy to which Part 2 of the Landlord and Tenant Act 1954 (c. 56) applies unless, at the relevant time, the tenant has been occupying the house, or any part of it, as his only or main residence (whether or not he has been using it for other purposes)-

(a)

for the last two years; or

(b)

for periods amounting to two years in the last ten years.”

The Respondents argue that the Appellant is a tenant to which Part 2 of the 1954 Act applies. This is because s 23(1) of that Act defines tenancies to which Part 2 applies as being those where the demised premises include premises occupied for business purposes. Since, according to the Respondents, the Appellant is a commercial landlord, it does occupy the Premises for business purposes. For these reasons s 1(1B) applies. The Appellant is not entitled to enfranchisement because, being a company, it cannot meet the residence requirement set by that section.

This raises a number of issues. First, Mr Gaunt relies upon the decision of this court in Bagettes Ltd v GP Estates [1956] Ch 290 in support of the proposition that the 1954 Act does not apply to the tenancy of a party who sublets flats in a building. Mr Radevsky suggests that that case may not apply here or may not be good law in the light of Lord Nicholls’ speech in Graysim Holdings Ltd v P & O Property Holdings Ltd [1996] AC 329, 339 – 340. Second Mr Gaunt says that the 1954 Act does not apply because the relevant lease contains a prohibition on business user. Mr Radevsky’s response is to say that, on its true construction, this clause does not prohibit commercial subletting. Alternatively he argues that the landlord must have been taken to have waived this prohibition. Third, Mr Gaunt argues that, because this issue was not raised earlier, neither party has served evidence relating to the question of whether, in fact, the Appellant carries on a relevant business in the Premises. For that reason he says that the Respondents have failed to demonstrate that s 1(1B) applies. Mr Radevsky’s response is to say that there is sufficient material before the court to allow it to be reasonably confident that a relevant business is being conducted in the Premises and, if it is not, the proper course would be to remit this case to the County Court for further consideration.

In addition to these points, Mr Gaunt raises a matter of practice. He refers to the provisions of paragraph 7(1) of Schedule 3 to the 1967 Act which sets the background against which this application to admit a new objection should be considered. It is in the following terms:

“Where a tenant of a house gives the landlord notice in accordance with Part 1 of this Act of the tenant’s desire to have the freehold or an extended lease, the landlord shall within two months give the tenant a notice in reply in the prescribed form stating whether or not the landlord admits the tenant’s right to have the freehold or extended lease (subject to any question as to the correctness of the particulars given in the tenant’s notice of the house and premises): and if the landlord does not admit the tenant’s rights, the notice shall state the ground on which it is not admitted.”

Mr Gaunt says that this court should not allow this new point to be raised particularly where, as here, it will inevitably involve an investigation of issues of fact to which neither party has turned its attention. He says that there is no reason why the approach adopted by this court in Pittalis v Grant [1989] 1 QB 605, 611 should not apply here. This point should have been taken at first instance and it is too late to raise it now.

Mr Radevsky says that this approach is too narrow. Although Schedule 3 uses mandatory language in relation to the content of the Notice in Reply, this does not mean that the landlord is excluded from putting all relevant arguments before the court. On the contrary, he says that these mandatory requirements can be largely ignored. There is no sanction if the additional grounds are added later, save that the tenant may be compensated in costs. He relies in particular on the following passage in Hague –Leasehold Enfranchisement (4^th Ed):

“… the failure to serve a Notice in Reply, (or an invalid or incomplete one), either within the two-month time limit or at all, has no practical adverse consequences for the landlord. In particular, it does not prevent the landlord from later challenging the validity of the tenant’s claim. … Overall, it is hard to see exactly what useful purpose the Notice in Reply serves in the form that has been prescribed.” (p 130).

A number of county court decisions are cited by the authors in support of this passage.

Mr Gaunt does not suggest that the provisions of paragraph 7(1) in Schedule 3 are so rigid that a landlord can never rely on a ground which was not set out in his Notice in Reply. Furthermore this court is not being invited to consider in what circumstances and subject to what limitations, if any, the landlord can raise new objections before a court of first instance. The issue here is whether the Respondents should be allowed to raise this ground for the first time on appeal. In my view they should not. Because this point was only raised just before the appeal, the Appellant has been deprived of the opportunity to consider and put forward evidence on the issues. It is only in exceptional circumstances that it would be appropriate to refer a matter back for further consideration by the trial judge. Here there is no suggestion that this point could not have been raised earlier nor have we been presented with any compelling reason why this should be allowed to be raised at this stage.

For these reasons, I would allow this appeal.

I agree.