Kensington Heights Commercial Company Ltd v Campden Hill Developments Ltd

Kensington Heights, 81 to 89 (odd) Campden Hill Road, London W8 (“the Property”) consists of 85 flats and 5 town houses, built on top of a car park with 215 spaces. The freehold of the Property is held by Kennet Properties Ltd (“Kennet”), which is a subsidiary of Thames Water.

This is an appeal from an order of His Honour Judge Levy QC made in the Central London County Court on June 20, 2006, that pursuant to Part I of the Landlord and Tenant Act 1987 (“the 1987 Act”) Campden Hill Developments Ltd (“Campden”) transfer to Kensington Heights Commercial Company Ltd (“Kensington”) the term granted by a lease of the Property dated November 27, 2000. Kensington is the person nominated by the overwhelming majority of the lessees of flats to exercise their rights under the 1987 Act.

The background is that by a Lease dated June 21, 1973 (“the 1973 Lease”), the Metropolitan Water Board (a predecessor of Thames Water), granted to Campden a lease of an area of land adjoining Campden Hill Road and Airlie Gardens for a term of 121 years from September 29, 1972. The 1973 Lease replaced an earlier lease between the same parties granting a term of 99 years from September 29, 1968.

Campden then developed the site by constructing the building now known as Kensington Heights. Underleases of the flats, houses and garage spaces were then granted by Campden for terms of 121 years, less 10 days, from September 29, 1972.

The landlord of the flat lessees for the purposes of the 1987 Act was Campden. By virtue of the 1987 Act, any proposed disposal of Campden’s interest required the flat lessees to be offered the right of first refusal.

In 2000 Thames Water (successor to the Metropolitan Water Board) entered into a joint venture with St. James’s Homes Ltd to develop the site of the former reservoir which lay immediately to the west of the Property. Thames Water formed Kennet, to which it transferred the freehold reversion upon the 1973 Lease.

By an Agreement dated October 19, 2000 (“the 2000 Agreement”) Kennet agreed with Campden to take a surrender of the lease of June 21, 1973 and grant a new lease to Campden of the same property (minus a narrow boundary strip adjoining Airlie Gardens) for a term of 125 years from the date of completion (i.e. a term 32 years longer than the existing lease). The purchase price payable by Kennet was £125,000. The tenants had no rights over the boundary strip, which was of value to Kennet in relation to the proposed development.

Pursuant to the 2000 Agreement, on November 27, 2000, the 1973 Lease was surrendered by a Deed of Surrender, and Kennet granted Campden the new lease (“the 2000 Lease”).

By an agreement dated March 7, 2001 Kennet agreed to sell to St James’s Homes Ltd a piece of freehold land including the boundary strip which was, by then, no longer demised to Campden. The purchase price was £125,000 plus a proportion of the sale proceeds of the new development.

On July 15, 2004 Campden granted Vodafone a sub-underlease of part of the roof of the Property for 10 years from December 1, 2003 at a rent of £22,000 per year to allow them to erect telecommunications apparatus. No equipment has been erected.

By a claim form issued on October 21, 2005 Kensington sought an order under Part I (“Tenant’s Rights of First Refusal”) of the 1987 Act that Campden “dispose of the estate or interest that was the subject-matter of the original disposal dated 19^th October 2000, on the terms on which it was made, including the consideration” to Kensington; and an order that the disposal be free from the Vodafone sub-underlease.

Part I of the 1987 Act (as amended by, in particular, the Housing Act 1996) is designed to give the tenants of flats a right of first refusal if their immediate landlord wishes to dispose of his interest in the premises.

In the 1980s there was increasing concern in relation to the management of and service charges imposed on blocks of flats. In 1985, the Report of the Committee of Inquiry on the Management of Privately Owned Blocks of Flats (the Nugee Report) was published. The Nugee Report discussed, among other concerns, the problems caused by the unrestricted right of the landlord under the general law to dispose of his interest in the reversion without reference to the wishes of the tenants. This had led in some cases to the freehold passing through several hands in quick succession, leaving the tenants uncertain as to who their landlord was and therefore unable to take any effective action.

Although the majority of the Nugee committee did not feel that tenants should be given a right to buy where the landlord wished to continue to own and manage the block, it recommended that tenants should have a right of first refusal where the landlord wished to dispose of his interest. This recommendation was implemented by Part I of the 1987 Act. In Belvedere Court Ltd v Frogmore Ltd [1997] QB 858, 876, Sir Thomas Bingham M.R. said that “the committee intended occupying tenants to have a right to acquire the reversion to their leases when their landlord proposed to part with it, and that the ultimate objective was to give the tenants in a block where the majority wanted it a power to manage the block themselves and so to have a greater say in their own affairs”.

I shall set out the crucial provisions verbatim later in this judgment, and in this section I shall summarise the principal provisions which are relevant.

Section 1 prohibits a “landlord” from making “a relevant disposal” affecting premises to which the 1987 Act applies unless it first serves the tenants with a notice offering the tenants the chance to buy the interest which is being sold on the same terms as the landlord is intending to sell it. “The landlord” is “the immediate landlord of the qualifying tenants”: section 2(1).

The rights of first refusal granted by the 1987 Act therefore only apply to disposals by the tenants’ immediate landlord – they do not apply to disposals of interests held by superior landlords. So if, for example, there is a headlease of a building then the headlessee is restricted from disposing of the headlease but the freeholder is not restricted from disposing of the freehold.

“A relevant disposal” is “the disposal by the landlord of any estate or interest” in the relevant premises: section 4(1). The definition expressly includes the surrender of a tenancy: section 4(3).

The rights of first refusal apply to contracts to create or transfer an estate or interest in the premises as well as applying to completed transactions: section 4A(1). Where a transfer is made pursuant to a contract then the contract is the relevant disposal and the transfer made pursuant to the contract is excluded from being a relevant disposal: section 4(2)(i).

Where the landlord proposes to make a relevant disposal then he is required to serve an offer notice on the qualifying tenants: section 5(1). The exact contents of the notice depend on the species of disposal: in particular, there are prescribed requirements for different offer notices in the case of contracts to be completed by a conveyance (section 5A). There are additional requirements where part of the proposed consideration is non-monetary (section 5E). The tenants in that instance can elect to pay, instead of the non-monetary consideration, an amount in money equivalent to its value in the hands of the landlord: section 8C(4).

In a case where no offer notices are served, the qualifying tenants are given rights against the purchaser, and against any subsequent purchaser: sections 11-16. Section 11A provides for notice to be served to obtain details of the disposal. Sections 12A-12C provide three methods of acquiring the interest that was disposed of in breach of the 1987 Act.

If the landlord proceeds with a disposal which is in breach of the offer requirements then the qualifying tenants are given certain rights against “the purchaser” (section 11), i.e. “the transferee under the original disposal (or, in the case of the surrender of a tenancy, the superior landlord)”: section 11(3).

The qualifying tenants have the right to obtain information about a disposal by serving a notice on the purchaser: section 11A.

Sections 12A, 12B and 12C give the qualifying tenants rights to acquire interests in three different situations: section 12A (Right of qualifying tenants to take benefit of contract); section 12B (Right of qualifying tenants to compel sale, &c by purchaser); section 12C (Right of qualifying tenants to compel grant of new tenancy by superior landlord).

Section 12A applies “where the original disposal consisted of entering into a contract”: section 12A(1). If the tenants serve a notice on the landlord under section 12A then “the contract shall have effect as if entered into not with the purchaser but with a person or persons nominated for the purposes of this section by the requisite majority of qualifying tenants”: ibid. Consequently, in those circumstances, the tenants may serve a notice on the landlord, i.e. their original landlord, whereby the contract is then treated as having been made with their nominated purchaser instead.

Section 12B applies where “the original disposal consisted of entering into a contract and no notice has been served under section 12A … or the original disposal did not consist of entering into a contract”. In this situation, the tenants can serve a notice on the purchaser “requiring him to dispose of the estate or interest that was the subject-matter of the original disposal, on the terms on which it was made (including those relating to the consideration payable), to a person or persons nominated for the purposes of this section”: section 12B(2).

Section 12C applies “where the original disposal consisted of the surrender by the landlord of a tenancy held by him”: section 12C(1). Section 12C(2) provides that the purchaser is obliged to “grant [to the nominated person] a new tenancy of the premises which were subject to the relevant tenancy, on the same terms as those of the relevant tenancy.”

Section 16 of the 1987 Act applies where (inter alia) a section 12B notice is served on the purchaser, but he no longer holds the estate or interest which was the subject matter of the original disposal. Section 16 applies where the purchaser has disposed of “the estate or interest that was the subject matter of the original disposal”: section 16(1). The purchaser is obliged to forward any notice served by the tenants under section 12B to the subsequent purchaser, whereupon it is provided that sections 12A-14 are to apply to the subsequent purchaser instead of applying to the purchaser as if the subsequent purchaser were the transferee under the original disposal.

The tenants of the flats are “qualifying tenants” within the meaning of the 1987 Act and the Property comprises premises to which Part I of the 1987 Act applies: sections 1(2) and 3.

By virtue of the 1987 Act, any proposed disposal of Campden’s interest in the Property required the flat lessees to be offered the right of first refusal.

No offer notices under section 5 of the 1987 Act were served on the qualifying tenants prior to the 2000 Agreement under which Campden agreed to surrender the 1973 Lease.

On December 22, 2004, the requisite majority of qualifying tenants served notice on Campden’s solicitors, Pemberton Greenish, under section 11A of the 1987 Act. The notice was addressed to Campden and sought particulars of the relevant disposal involving the grant of the new lease. It seems that a draft notice in identical terms but addressed to Kennet was prepared but not sent and that the judge was wrongly informed that the notice was sent to Kennet and not to Campden.

By notice giving particulars of a disposal dated February 7, 2005, Campden’s solicitors (on behalf of Campden) stated that the 2000 Lease was entered into pursuant to the 2000 Agreement, and attached an incomplete copy of the 2000 Agreement.

On July 28, 2005 the tenants served a section 12B purchase notice on Kennet copied to Campden’s solicitors. The notice stated that the tenants had reason to believe: (a) that Kennet had acquired an interest in the Property from Campden under the 2000 Agreement; (b) that Part I of the 1987 Act applied to the Property at the time of that disposal to Kennet; and (c) that the disposal to Kennet was a relevant disposal and had been made without Campden having served notice under section 5 of the 1987 Act. The notice then required Kennet to dispose of the interest that was the subject matter of the disposal to Kennet on the terms on which it was made, including the consideration, to Kensington. The notice proposed that if the Property had become subject to any encumbrance other than a charge, the Property should be disposed of subject to the encumbrance.

In a covering letter the tenants’ solicitors called upon Kennet to forward the section 12B notice to Campden under section 16 of the 1987 Act and stated that they would be seeking an order from the Court under section 12B(5) directing that “the lease” be transferred to Kensington “free from any lease entered into subsequent to October 19, 2000”.

On September 28, 2005 Kensington served a default notice on Campden under section 19(2) of the 1987 Act stating that Campden were in default of an obligation:

On October 21, 2005 Kensington issued proceedings under CPR Part 8 seeking an order that Campden dispose of the estate or interest that was the subject matter of the original disposal dated October 19, 2000 on the terms on which it was made, including the consideration, to Kensington.

In response to the suggestion that Kensington had not clearly identified what estate or interest Campden was being asked to dispose of to Kensington, Kensington then made it clear that it was seeking the transfer to it from Campden of the term created by the 2000 Lease, rather than a regrant by Kennet of the 1973 Lease which had been surrendered, and, to achieve this, was relying on section 16 of the 1987 Act.

The judge’s decision was that the 2000 Agreement was a relevant disposal within section 4, and was not excluded by section 4(2)(i). The exclusion was directed to a contract prior to the “disposal” by the landlord. The judge said that he had been shown no “contract ... binding on the landlord” prior to the time the 2000 Agreement was made.

In the light of the failure of Campden in 2000 to provide information, Campden was in breach of its obligations contained in Part 1 as regards the 2000 Agreement and a notice could properly be served under section 11A seeking information.

In the light of what was known to those who served it at the time it was served and having regard to sections 11A, 16(1), (2), and (5), it was appropriate for Kennet to be identified as the purchaser and for Kennet’s attention to be drawn to the provisions of section 16.

In view of the fact that the 2000 Agreement was the original disposal from which all else followed, the use of a section 12C notice would not have been justified. The notice made clear that Kensington wished to be in the position it would have been in had notice of the 2000 Agreement been duly served as required under the relevant provisions of Part 1. A section 12B purchase notice was the appropriate notice to be served before Kensington could seek relief arising from Campden’s failure to serve an appropriate notice when the 2000 Agreement was made: Kay Green v Twinsectra Ltd [1996] 1 WLR 1587.

The consequence was that Kensington was entitled to relief and should be put in the position that Campden had under the 2000 Lease. It would be unjust to consider the surrender in isolation from the 2000 Lease, although the judge accepted that there were difficulties in reviving a lease which had been surrendered. But because of the failure to mention clearly in the purchase notice the relief it sought Kensington was not entitled to the relief sought in paragraph 2 of the claim, namely that the disposal be free from the Vodafone Lease.

The order made was that Campden should, after the consideration was determined by the Leasehold Valuation Tribunal (in default of agreement), transfer to Kensington the 2000 Lease, subject to the Vodafone Lease.

Campden was given permission to appeal by the judge. Kensington cross-appeals on the judge’s decision on the Vodafone Lease, and also seeks alternative relief if Campden’s grounds of appeal are made out: (a) a grant of a new lease on the same terms as the 1973 Lease; (b) a declaration that the time for service of a section 12C notice has not arrived; and (c) a declaration that the notice served is to be treated as a section 12C notice.

First, the judge was wrong to hold that the 2000 Agreement, in which Kennet agreed to grant the 2000 Lease, was a relevant disposal under the 1987 Act, apparently because it was a contract to create an estate or interest in land and because there had been no previous contract binding on the landlord.

In so holding, the judge misunderstood the argument being put forward for Campden. He appears to have thought that it was being argued that the 2000 Agreement did not amount to a relevant disposal because of the exclusion in section 4(2)(i).

That was never Campden’s case. Campden had always accepted that the agreement to surrender was a relevant disposal but argued that the agreement by Kennet (who was not “the landlord” as defined in the 1987 Act) to grant a new lease was not. The judge did not address or determine that question. Nor did he address or determine the submission that section 16 did not apply because the 2000 Lease was not “the estate or interest that was the subject matter” of the agreement to surrender.

Second, the judge was wrong to hold that a section 12C notice was not required as a precondition of the relief sought.

The section 12B notice was served by Kensington on Kennet and required the transfer of the “subject matter of the disposal to you.” The subject matter of the disposal to Kennet was the 1973 Lease. The nature of that disposal was an agreement to surrender. In those circumstances the notice that Kensington was entitled to serve on Kennet was a section 12C notice.

Section 12B would make no sense where a surrender is concerned. The “purchaser” (i.e. the superior landlord to whom the lease has been surrendered: section 11(3)) could not be required to “dispose of the estate or interest that was the subject-matter of the original disposal” to the qualifying tenants, because the subject matter is the lease and, following the surrender, the lease no longer exists.

Section 12C applies to contracts to surrender as well as actual surrenders by reason of section 4A(1), and provides for a different remedy: the purchaser is obliged to “grant [to the nominated person] a new tenancy of the premises which were subject to the relevant tenancy, on the same terms as those of the relevant tenancy” (i.e. the tenancy that has been surrendered): section 12C(2).

Kensington had served no section 12C notice. All it had served was a notice under section 12B. Because section 12B did not apply to a contract for a disposal of this nature, the precondition for obtaining relief had not been satisfied.

Third, the judge was wrong to hold that the justice of the situation required an order for the transfer of the 2000 Lease.

The judge did not determine whether the relevant disposal was the surrender of the 1973 Lease or the grant of the 2000 Lease. Nevertheless, when he considered what was the appropriate relief, he held: “[Kensington] should be put in the position that Campden now has under the 2000 Lease. In my view it would be unjust to consider the surrender in isolation from the 2000 lease …”

This was the wrong conclusion. The judge did not consider the consequences of his order or whether it accorded with the aims and objects of the 1987 Act.

What Part I of the 1987 Act aims to do is to give the qualifying tenants a right of first refusal where their immediate landlord wishes to sell his interest in the building. Here, Campden were not trying to sell their interest. Rather they wanted to buy a longer term. The effect of the judge’s order is to give the qualifying tenants not what Campden were giving up (the 1973 Lease) but what they were buying, at a price represented by the value of the interest that Campden was giving up. The order gets the interest that was the subject matter of the disposal and the interest that was the consideration for the disposal the wrong way round. The order does not give effect to the purpose of the 1987 Act, and gives the tenants an interest that they were not intended to have.

The tenants were not without a remedy in the situation which had arisen. They could have served a section 12C notice on Kennet and become entitled to a grant by Kennet of a lease on the same terms and for the same term as that of the 1973 Lease. Instead they are seeking to deprive Campden of an interest that Campden never disposed of.

As regards the cross-appeal, Campden says that if it is ordered to grant Kensington a new lease on the same terms as the surrendered 1973 Lease then this will necessarily be a grant made out of the 2000 Lease. There would be no other way for Campden to comply with the order.

But it is not possible, under the provisions of the 1987 Act, for an order to be made for Campden to grant to Kensington a new lease which is the same as the 1973 Lease that was surrendered. The 1973 Lease was extinguished by a surrender to Kennet. Kensington could have asked for an order against Kennet (under a section 12C notice) that Kennet regrant it, but they have not gone down that route. Kennet are not a party to these proceedings.

But, if the premise of this alternative submission from Kensington is that the subject matter of the original disposal was the 1973 Lease, then it can only have an order against Campden if section 16 applies. Section 16 applies only if the “estate or interest” that was the subject matter of the original disposal (the 1973 Lease) was also the subject matter of a later disposal by Kennet to Campden. But Campden does not have the same estate or interest that was surrendered to Kennet; it has a different lease on different terms from the 1973 Lease.

The solution which Kensington appears to propose to this is to say that the phrase “estate or interest” in section 16 should be read in some broad or purposive fashion: Campden had the “the immediate reversion to the tenants’ leases”, it is said; it disposed of that reversion to Kennet by surrendering the 1973 Lease; and then it got the reversion back again by taking the new 2000 Lease.

But the phrase “estate or interest” is one with an understood meaning in the law of property which is not the same as “the immediate reversion to the tenants’ leases”. If all that the phrase “estate or interest” meant was “the immediate reversion to the tenants’ leases”, then a freeholder who had taken a surrender of the residue of an intermediate lease might be required to sell the nominated purchaser his entire freehold.

Section 12B applies where the original disposal consisted of entering into a contract and no section 12A notice has been served, or where the original disposal did not consist of entering into a contract. In those circumstances, the tenants may serve notice on the purchaser requiring him to dispose of the subject matter of the original disposal on the same terms to the nominated purchaser. That is evidently the more appropriate procedure where the contract has been completed, which is what occurred in this case.

Section 12C applies where the “original disposal” consisted of the surrender by the landlord of a tenancy held by him. The original disposal did not consist of a surrender. It consisted of entering into a contract for a surrender and grant of a new lease, and so a section 12B notice was appropriate.

The relevant disposal was the entry into the 2000 Agreement. Pursuant to the 2000 Agreement, the 1973 Lease was surrendered and the 2000 Lease was granted to Campden. Kennet did not hold the surrendered 1973 Lease, nor did they hold the unencumbered freehold of the Property.

It was correct, therefore, for Kensington to request Kennet to forward the section 12B notice on to Campden and to serve a section 16 notice, and the section 12B procedure thereafter applied to Campden as subsequent purchaser: section 16(4).

The interest held by Campden has, since November 27, 2000, been the new 2000 Lease. It is that Lease which ought, under the 1987 Act, to be transferred to Kensington, for the same consideration as that provided by Campden. Since the consideration was not a monetary sum, it is for the leasehold valuation tribunal to determine the consideration payable under section 13 of the 1987 Act. Had Campden complied with its obligations under the 1987 Act, it would have served an offer notice under section 5E on the qualifying tenants, and the leasehold valuation tribunal could have determined the equivalent monetary consideration: section 8C(4).

The surrender of the 1973 Lease does not put an end to the qualifying tenants’ rights under the 1987 Act. The purchaser (Kennet) accepted a surrender of the 1973 Lease and thereupon granted the 2000 Lease to Campden. It is that Lease which is claimed by Kensington.

Kennet obtained the immediate reversion to the tenants’ leases - a freehold interest unencumbered by the headlease. Kennet no longer hold that interest (i.e. an unencumbered freehold interest), having granted a new lease to Campden. Accordingly, section 16 of the 1987 Act applies. It is now by virtue of that 2000 Lease that Campden is the landlord of the flat lessees, and it was granted as part of the transaction effected by the 2000 Agreement. Campden holds the reversion to the qualifying tenants’ leases. The judge was correct to give effect to the qualifying tenants’ rights by requiring the transfer of that Lease to them for the same consideration as that provided by Campden. The qualifying tenants should not have their statutory rights removed by reason of the complexity of the arrangement entered into by their landlord. See Belvedere Court Management Ltd v Frogmore Developments Ltd [1997] QB 858, 882 and 886.

If (contrary to its primary submission) it was the 1973 Lease that was the subject matter of the 2000 Agreement, in the alternative Kensington seeks the grant of a new lease to it on the same terms as the 1973 Lease, which would be carved out of the 2000 Lease. The consideration would be the same i.e. £125,000 plus the value of the 2000 Lease (subject to adjustment for the fact that the additional piece of land is not being acquired).

If Kensington is wrong in its submission that it was not the surrender, but the 2000 Agreement which constituted the relevant disposal, and a section 12B notice was therefore appropriate, then the time for serving a section 12C notice has not yet arrived, because the purchaser has not served notice on the qualifying tenants stating that that disposal (i.e. a surrender) has taken place: see section 12C(3). The notice giving particulars of the disposal dated February 7, 2005 did not assert that the surrender of the 1973 Lease was the disposal. It is, therefore, not open to Campden (or Kennet) now to assert that the time limit for serving a section 12C notice has passed.

Alternatively, if, which Kensington denies, a section 12C notice ought to have been served, rather than a section 12B notice (as asserted by Campden), the notice that was served should be treated as a section 12C notice. The notice made it clear that the qualifying tenants wished to exercise their purchase notice rights under the 1987 Act, and followed Campden’s response to the section 11A notice. Kennet no longer hold the interest that was the subject matter of the original disposal (the immediate reversion to the flat leases), having disposed of it to the defendant by granting Campden the 2000 Lease. Consequently, under section 16, it is for Campden to grant Kensington a new lease equivalent to the 1973 Lease. The consideration (based on the value of the 2000 Lease) would be for the leasehold valuation tribunal to determine under section 12C(6).

If, contrary to Kensington’s primary submission, Campden is to grant Kensington a new lease on the same terms as the 1973 Lease, then it should be free from the 2000 Lease, otherwise the tenants would not be in the same position as Campden. Alternatively, the new lease granted to Kensington should be granted out of the 2000 Lease, such that Kensington has possession of the Property for the duration of the new lease granted to it. If Campden were left with a concurrent lease, the tenants would have no effective remedy, notwithstanding that Campden was in breach of the 1987 Act in not giving notice.

This appeal raises the question how the 1987 Act operates in the case of an agreement to surrender a headlease in return for the grant of a longer term.

In the light of the fuller argument on this difficult legislation of which this court has had the benefit, I have come to the conclusion that Campden is right, and that the appeal should be allowed.

The crucial facts are the following:

Until 2000 Campden held under the 1973 Lease from Thames Water.

In 2000 the freehold reversion was transferred to Kennet.

By the 2000 Agreement Kennet agreed with Campden to take a surrender of the 1973 Lease and grant a new lease to Campden of the same property minus the boundary strip for a term of 125 years from the date of completion.

On November 27, 2000, the 1973 Lease was surrendered by a Deed of Surrender, and Kennet granted Campden the new lease.

The tenants of the flats are “qualifying tenants” within the meaning of the 1987 Act and the Property comprises premises to which Part I of the 1987 Act applied: sections 1(2) and 3 of the 1987 Act.

By virtue of the 1987 Act, any proposed disposal of Campden’s interest in the Property required the flat lessees to be offered the right of first refusal.

No offer notices under section 5 of the 1987 Act were served on the qualifying tenants prior to Campden’s agreement in 2000 to surrender the 1973 Lease.

On December 22, 2004, the requisite majority of qualifying tenants served notice on Campden’s solicitors, Pemberton Greenish, under section 11A of the 1987 Act addressed to Campden seeking particulars of the relevant disposal involving the grant of the new lease.

By notice giving particulars of a disposal dated February 7, 2005, Campden’s solicitors stated that the new lease was entered into pursuant to the 2000 Agreement, and attached an incomplete copy of the Agreement.

On July 28, 2005 the tenants served a section 12B purchase notice on Kennet, stating that Kennet had acquired an interest in the Property from Campden under the 2000 Agreement, and that the disposal to Kennet was a relevant disposal and had been made without Campden having served notice under section 5 of the 1987 Act; and requiring Kennet to dispose of the interest that was the subject matter of the disposal to Kennet on the terms on which it was made, including the consideration, to Kensington.

The combined effect of sections 1 and 2 was that Campden, as the immediate landlord, was prohibited from making a relevant disposal unless it had served a notice under section 5.

What amounts to a “relevant disposal” is defined in section 4:

Section 4A provides:

The combined effect of sections 4(1), 4(2)(i), 4(3) and 4A(1) was that the 2000 Agreement, which contained an agreement to surrender, was the relevant disposal.

An offer notice should have been, but was not, served under section 5, stating (inter alia) that the tenants could make an election in relation to the non-monetary consideration: sections 5E, 8C(2).

As a result of the failure to serve a section 5 notice, the tenants had the rights conferred by section 11 et seq., including the right to information, and the rights under whichever of sections 12A, 12B, and 12C applied.

Section 12A did not apply, because it applies to cases “where the original disposal consisted of entering into a contract” and deals with the case where the contract has not been completed. It contemplates that a notice is served by the tenants on the landlord electing that the contract shall have effect as if entered into not by the purchaser but by the person or persons nominated by the tenants. This is only workable if the contract has not been completed.

Section 12B provides:

Where the property which the purchaser is required to dispose of in pursuance of the purchase notice has since the original disposal become subject to …. [an] incumbrance, then, unless the court by order directs otherwise –

Section 12C provides:

In Kay Green v Twinsectra Ltd [1996] 1 WLR 1587 it was held that a purchase notice must give adequate notice of the qualifying tenants’ desire to purchase the estate or interest that they should have been offered, and that that requirement was imperative: at 1600 and 1601, per Aldous LJ.

Although the opening words of section 12B(1)(a) (“the original disposal consisted of entering into a contract…”) are literally capable of applying to a contract to surrender, I am satisfied that the context shows that they are not intended so to apply. First, the rest of section 12B does not fit with a surrender. In particular it speaks of requiring the “purchaser” (Kennet) “to dispose of the estate or interest that was the subject-matter of the original disposal on the terms on which it was made …” (section 12B(2)). Section 12B would make no sense in the case of a surrender. The “purchaser” (i.e. the superior landlord to whom the lease has been surrendered: section 11(3)) could not be required to “dispose of the estate or interest that was the subject-matter of the original disposal” to the qualifying tenants, because the subject matter is the lease and, following the surrender, the lease no longer exists. Section 12B speaks also of the case “where the property which the purchaser is required to dispose of ... has since the original disposal become subject to any charge or incumbrance” (section 12B(5)), and this could not apply in the case of surrender.

Section 12C applies “where the original disposal consisted of the surrender by the landlord of a tenancy …”: section 12C(1). The effect of section 4A(1) is that the expression “surrender” includes a contract to surrender, because “(a) references to a disposal of any description shall be construed as references to a contract to make such a disposal; (b) references to making a disposal of any description shall be construed as references to entering into a contract to make such a disposal …” Even if section 4A(1) did not have this effect, in my judgment section 12C(1) would have that effect in any event, because the only sensible construction to give effect to its intention would be that it applied to a contract to surrender, and to give the tenants the intended remedy, namely that the purchaser is obliged to “grant [to the nominated person] a new tenancy of the premises which were subject to the relevant tenancy, on the same terms as those of the relevant tenancy” (i.e. the tenancy that has been surrendered): section 12C(2).

The purchase notice of July 28, 2005 was undoubtedly made under section 12B. First, the covering letter addressed to Kennet stated: “… we enclose by way of service a Purchase Notice under Section 12B …” Second, the purchase notice contained on its frontsheet: “NOTICE GIVEN UNDER SECTION 12B LANDLORD AND TENANT ACT 1987” Third, the notice itself was headed “NOTICE UNDER SECTION 12B.” Fourth, the notice required Kennet “to dispose of the estate or interest that was the subject-matter” of the disposal, which tracks the wording of section 12B(2), and has no counterpart in section 12C.

There is therefore no basis for Kensington’s contention that the notice should be treated as if it were a section 12C notice.

In any event, the tenants had no right to call on Kennet to forward the section 12B notice to Campden under section 16 of the 1987 Act and state that they would be seeking an order from the court under section 12B(5) directing that “the lease” be transferred to Kensington “free from any lease entered into subsequent to October 19, 2000”.

A purchase notice under section 12B(2) requires the purchaser “to dispose of the estate or interest that was the subject-matter of the original disposal.”

Section 16 applies where the purchaser “no longer holds the estate or interest that was the subject-matter of the original disposal” (section 16(1)), and the purchaser serves notice on “the person to whom he has disposed of that estate or interest” (section 16(2)(a)). Section 16 provides:

Section 16 had no application to the 2000 Lease because the 2000 Lease was not “the estate or interest that was the subject-matter” (section 16(1)) of the agreement to surrender. The interest in the 1973 Lease was extinguished. Campden was not “the person to whom [Kennet] has disposed of that estate or interest,” namely, the 1973 Lease.

I accept Campden’s argument that the tenants were seeking to obtain not what Campden were giving up (the 1973 Lease) but what they were buying, at a price represented by the value of the interest that Campden was giving up.

The tenants could have served a section 12C notice on Kennet and become entitled to a grant by Kennet of a lease on the same terms and for the same term as that of the 1973 Lease.

In my judgment the court does not have power to order Campden to grant to Kensington a new lease in the same terms as the 1973 Lease which was surrendered. The 1973 Lease was extinguished by a surrender to Kennet. An order can be made against Campden only if section 16 applies. But section 16 applies only if the “estate or interest” that was the subject-matter of the original disposal (the 1973 Lease) was also the subject-matter of a later disposal by Kennet to Campden. Campden does not have the same estate or interest that was surrendered to Kennet; it has a different lease on terms different from those of the 1973 Lease.

In the Respondent’s Notice Kensington seeks in the alternative a declaration that the time for service of a section 12C notice on Kennet has not arrived. Although this point was raised in argument in the court below, no such relief was sought. Kennet is not a party, and it is not open to Kensington to seek in this court a declaration, not sought below, that the tenants are still entitled to serve a section 12C notice on Kennet.

The cross-appeal on the Vodafone Lease does not arise in view of the conclusions to which I have come.

I would add that in my judgment these conclusions are consistent with the scheme and purpose of the 1987 Act. Campden was the headlessee before the transaction and Campden was the headlessee afterwards. Commercially Campden was not disposing of its headleasehold interest. It was enlarging it. As I have said, the 1987 Act was intended to give effect to a policy restricting the right of the landlord to dispose of his interest in the reversion without reference to the wishes of the tenants, and leaving tenants uncertain as to the identity of their landlord and therefore unable to take any effective action; and to give the tenants in a block where the majority wanted it a power to manage the block themselves and so to have a greater say in their own affairs.

I would therefore allow the appeal, and dismiss the cross-appeal.

I agree.

I also agree.