Hughes v Borodex Ltd.

This appeal, which is from the judgment of Collins J dated 25 March 2009, concerns the potentially harsh results of a recent change in legislation governing long residential tenancies within Part I of the Landlord and Tenant Act 1954 (“the 1954 Act”). This change was brought about by the Local Government and Housing Act 1989 (“LGHA 1989”). A long residential tenancy fell within Part I of the 1954 Act if it was a long tenancy at a low rent and met the qualifying conditions for protection in the Rent Act 1977, save for the fact that it was at a low rent. As from the commencement of the LGHA 1989, tenancies of this kind were to be phased out as they expired: on expiry, the tenant would in general remain in possession under an assured periodic tenancy under the Housing Act 1988 (“the HA 1988”). No new tenancy under Part I of the 1954 Act could be created.

This appeal is concerned with the determination of the rent under the new assured periodic tenancies. The question is whether the improvements, which the appellant, Mrs Cherry Sheila Hughes, made to her flat, Flat A, 25 Tite Street, London SW3 4JR, in the early 1990s while she was a tenant under a long residential tenancy within Part I of the 1954 Act, must now, on the expiry of that tenancy and the grant to her of an assured tenancy of the same premises, be taken into account in fixing her rent. If they must be taken into account for this purpose, then the rent for her flat, which has now been determined on this basis by the rent assessment committee (“RA committee”), will be increased because of the improvements to the premises for which she paid. In addition, on the facts of this case, her rent will exceed £25,000 per annum, which is the current statutory maximum for protection as an assured tenant. She loses that protection, and her landlord (“Borodex”) can accordingly serve a notice to quit.

This statement of the problem, to some extent at least, invites the immediate response: “surely not”. While the common law did not lay down any general rule that prevented a landlord and tenant from agreeing that improvements could be taken into account in fixing the rent even if the tenant had paid for them, such improvements are often excluded from contractual rent reviews. They are also often excluded where the tenancy is a residential tenancy and the tenant has some statutory protection. Thus, under section 70(3)(b) of the Rent Act 1977, which also applies to long residential tenancies which are subject to Part I of the 1954 Act, improvements made by the tenant under the regulated tenancy or his predecessor in title are to be disregarded. It is presumptively unfair to the tenant that he should have to pay an increased rent when he paid for the improvements in the first place.

Until 21 June 2003, Mrs Hughes was in occupation of her flat as the assignee under an underlease for a term of 39 ¼ years less 3 days from 25 March 1964. That underlease expired on 21 June 2003. On 24 October 2003 Borodex gave her notice (“the first notice”) under paragraph 4(1) of schedule 10 to the LGHA determining her long residential tenancy and proposing a new assured periodic tenancy commencing on 28 February 2004 at a rent of £2,600 per month. Mrs Hughes gave a counter-notice proposing a rent of £1,300 per month and the matter was referred to the RA committee to determine the rent.

On that occasion, the rent fell to be determined under paragraph 11 of schedule 10 to the LGHA 1989 and under those provisions the RA committee disregarded the improvements and determined the rent at £1,668 per month commencing on 28 February 2004. No issue arises about that determination.

On 25 September 2007, Borodex gave a further notice (“the second notice”) to Mrs Hughes under section 13(2) of the HA 1988 proposing a new rent of £3,167 per month. On 22 October 2007 Mrs Hughes referred that notice to the RA committee under section 13(4) of the HA 1988 for a determination of the rent. On this occasion, however, the RA committee concluded that it was not entitled to disregard the improvements that Mrs Hughes had made to the flat.

Mrs Hughes then appealed from the decision of the RA committee to the High Court of Justice, and her appeal was heard by Collins J.

The phasing out of long residential tenancies is provided for by section 186 of the LGHA 1989:

“186(1) Schedule 10 to this Act shall have effect (in place of Part I of the Landlord and Tenant Act 1954) to confer security of tenure on certain tenants under long tenancies and, in particular, to establish assured periodic tenancies when such long tenancies come to an end.

(2)

Schedule 10 to this Act applies, and section 1 of the Landlord and Tenant Act 1954 does not apply, to a tenancy of a dwelling-house—

(a)

which is a long tenancy at a low rent, as defined in Schedule 10 to this Act; and

(b)

which is entered into on or after the day appointed for the coming into force of this section, otherwise than in pursuance of a contract made before that day.”

The detailed statutory scheme for the phasing out of long residential tenancies is contained in schedule 10 to the LGHA 1989. When a long residential tenancy expires, it is continued by paragraph 3(1) of schedule 10 until it is terminated in accordance with the provisions of schedule 10. Borodex served the first notice under paragraph 4 of schedule 10, which had the effect of terminating the long residential tenancy on the date set out in paragraph 4. Paragraph 4 provides in material part:

“4(1) Subject to sub-paragraph (2) below and the provisions of this Schedule as to the annulment of notices in certain cases, the landlord may terminate a long residential tenancy by a notice in the prescribed form served on the tenant—

(a)

specifying the date at which the tenancy is to come to an end, being either the term date or a later date; and

(b)

so served not more than twelve nor less than six months before the date so specified…

(2)

In any case where—

(a)

a landlord's notice has been served, and

(b)

an application has been made to the court or a rent assessment committee under the following provisions of this Schedule other than paragraph 6, and

(c)

apart from this paragraph, the effect of the notice would be to terminate the tenancy before the expiry of the period of three months beginning with the date on which the application is finally disposed of,

the effect of the notice shall be to terminate the tenancy at the expiry of the said period of three months and not at any other time.”

The notice has to propose an assured monthly periodic tenancy of the premises and a rent for that tenancy (paragraph 4(5) of schedule 10). Once the landlord has served this notice, he can propose an interim rent to cover the period between the date of the notice and the date when a new assured periodic tenancy comes into effect (paragraph 6 of schedule 10). If the interim rent cannot be agreed, the determination of that rent is carried out by the RA committee. For this purpose, improvements effected by the tenant under his long residential tenancy are expressly disregarded (paragraph 6(5) of schedule 10). We are not concerned with the interim rent so I need not set out the provisions of paragraph 6.

Paragraph 9 of schedule 10 provides that, when a long residential tenancy is terminated by the landlord’s notice proposing an assured tenancy, the tenant remains in possession under a monthly assured periodic tenancy. It also sets out the provisions which then come into effect with a view to providing, at least at the outset, the terms of that new tenancy. Accordingly, paragraph 9 provides in material part:

“9(1) Where a long residential tenancy (in this paragraph referred to as “the former tenancy”) is terminated by a landlord's notice proposing an assured tenancy, then, subject to sub-paragraph (3) below, the tenant shall be entitled to remain in possession of the dwelling-house and his right to possession shall depend upon an assured periodic tenancy arising by virtue of this paragraph.

(2)

The assured periodic tenancy referred to in sub-paragraph (1) above is one—

(a)

taking effect in possession on the day following the date of termination;

(b)

deemed to have been granted by the person who was the landlord under the former tenancy on the date of termination to the person who was then the tenant under that tenancy;

(c)

under which the premises let are the dwelling-house;

(d)

under which the periods of the tenancy, and the intervals at which rent is to be paid, are monthly beginning on the day following the date of termination;

(e)

under which the rent is determined in accordance with paragraphs 10 to 12 below; …

(4)

Any reference in the following paragraphs of this Schedule to an assured periodic tenancy is a reference to an assured periodic tenancy arising by virtue of this paragraph.”

Assured periodic tenancies were created by the HA 1988 and the provisions of sections 13 and 14 of that Act deal with the determination of the rent. An assured periodic tenancy confers protection on the tenant in that (1) the landlord can only terminate the tenancy on certain grounds; and (2) the tenant is able to refer the rent to the RA committee for determination. For a description of assured tenancies, see generally Megarry & Wade, The Law ofReal Property, 7 ed, pages 1007 to 1020. No amendment was made to section 13 or 14 when schedule 10 of the LGHA 1989 was enacted.

Paragraphs 10 to 12 of schedule 10, which appear following a heading which reads “Initial rent under and terms of assured periodic tenancy”, deal with the rent payable under the new assured tenancy. In particular, in the event of a dispute, under paragraph 11(5), the RA committee is directed to determine the rent at which it considers that the premises “might reasonably be expected to be let in the open market by a willing landlord under an assured tenancy (not being an assured shorthold tenancy)…”. That provision is stated to be subject to paragraph 11(6), which applies certain provisions in section 14 of the 1988 Act with modifications, including a modification of section 14(2), as set out in paragraph 11(7), which provides as follows:

“ (7) The modifications of section 14 of the 1988 Act referred to in sub-paragraph (6) above are that in subsection (2), the reference in paragraph (b) to a relevant improvement being carried out shall be construed as a reference to an improvement being carried out during the long residential tenancy …”

The effect of this provision is that under paragraph 11 improvements which were carried out during the long residential tenancy are disregarded in determining rent under that paragraph.

Paragraph 12 contains certain miscellaneous provisions, including the following:

“(1)

Subsections (2) to (4) of section 41 of the 1988 Act (rent assessment committees: information powers) shall apply where there is a reference to a rent assessment committee under the preceding provisions of this Schedule as they apply where a matter is referred to such a committee under Chapter I or Chapter II of Part I of the 1988 Act.

(2)

Nothing in paragraph 10 or paragraph 11 above affects the right of the landlord and the tenant to agree any terms of the assured periodic tenancy (including a term relating to the rent) before the tenancy takes effect in possession (in this sub-paragraph referred to as “the expressly agreed terms”); and, in such case,—

(a)

the expressly agreed terms shall be terms of the tenancy in substitution for any terms dealing with the same subject matter which would otherwise, by virtue of paragraph 10 or paragraph 11 above, be terms of the tenancy; and

(b)

where a reference has already been made to a rent assessment committee under sub-paragraph (2) of paragraph 10 above but there has been no determination by the committee under paragraph 11 above,—

(i)

the committee shall have regard to the expressly agreed terms, as notified to them by the landlord and the tenant, in deciding, for the purposes of paragraph 11 above, what the disputed terms are and whether there is any dispute as to the rent; and

(ii)

in making any determination under paragraph 11 above the committee shall not make any adjustment of the expressly agreed terms, as so notified.”

Borodex served its second notice under section 13 (2) of the HA 1988, which applies to assured periodic tenancies with certain exceptions which are not material. Under section 13, this notice could not be served until one year after the rent fixed by the RA committee on the first occasion had expired (and a similar period would apply to any subsequent notice). Mrs Hughes then referred the matter to the RA committee. The RA committee became bound to determine the rent under section 14 of the HA 1988. Section 14(2) of the HA 1988 provides that in making a determination of the rent:

“there shall be disregarded—

… (b) any increase in the value of the dwelling-house attributable to a relevant improvement carried out by a person who at the time it was carried out was the tenant, if the improvement—

(i)

was carried out otherwise than in pursuance of an obligation to his immediate landlord, or

(ii)

was carried out pursuant to an obligation to his immediate landlord being an obligation which did not relate to the specific improvement concerned but arose by reference to consent given to the carrying out of that improvement; and…

The definition of “relevant improvement” is contained in section 14(3). Essentially this creates two alternative tests to determine what is a “relevant improvement”. The first is that the improvement was carried out under the same tenancy (ie the periodic assured tenancy) and this was not satisfied. The second test required the satisfaction of three cumulative conditions:

“(3)

For the purposes of subsection (2)(b) above, in relation to a notice which is referred by a tenant as mentioned in subsection (1) above, an improvement is a relevant improvement if either it was carried out during the tenancy to which the notice relates or the following conditions are satisfied, namely—

(a)

that it was carried out not more than twenty-one years before the date of service of the notice; and

(b)

that, at all times during the period beginning when the improvement was carried out and ending on the date of service of the notice, the dwelling-house has been let under an assured tenancy; and

(c)

that, on the coming to an end of an assured tenancy at any time during that period, the tenant (or, in the case of joint tenants, at least one of them) did not quit.”

The alternative test was not, on the face of it at least, satisfied because the improvements were carried out under the long residential tenancy and not under an assured tenancy. Thus, section 14(3)(b) was not satisfied. The provisions which apply when the RA committee determines the initial rent under schedule 10 are different because in that event section 14(3) does not apply, and section 14(2) is modified so as to apply to improvements carried out under the long residential tenancy: see subparagraphs (6) and (7) of paragraph 11 of schedule 10, which I have already described.

Before the judge, Mrs Hughes was represented by her junior counsel, Dr Victoria Williams. She submitted to the judge that the court should read into the provisions of the LGHA 1989 dealing with the determination of rent words which would put a tenant under an assured tenancy, who had formerly been in possession of the premises under a long residential tenancy to which Part I of the 1954 Act applied, into the same position as regards improvements as he had enjoyed under his previous tenancy. Under the 1954 Act improvements made by him during the tenancy would have been disregarded for the purposes of determining the rent. However, Collins J held that, where statutory provisions are unambiguous, it is only in exceptional circumstances, such as where a provision in a statute would otherwise be totally unreasonable (see generally Inco Europe Ltd v First ChoiceDistribution [2000] 1 WLR 586), that the courts may write in words to achieve a supposed purpose. Here it was not possible to be satisfied that the removal of the protection of former tenants under long residential tenancies was inadvertent. Schedule 10 showed that some consideration had been given to the protection for such tenants. He concluded that:

“I would have construed the provisions in [Mrs Hughes’] favour if I had been satisfied that there had been a draftsman’s error or that Parliament could not have meant to disadvantage tenants in her position. But for the reasons I have given I am unable to justify such a radical amendment of the statutory provisions. I am afraid they mean what they say and I must dismiss this appeal.”

Counsel are agreed that there is no relevant or admissible material in Hansard which bears on the problem in this case. No reliance has been placed on the European Convention on Human Rights. The arguments in this case have therefore been based on the statutory interpretation of the HA 1988 and the LGHA 1989 according to ordinary principles.

Schedule 10 to the LGHA 1989 is headed “Security of tenure on ending of long residential tenancies” and it contains detailed provisions to achieve the result that long residential tenancies within Part I of the 1954 Act are phased out and that tenants have the chance at least to become tenants in respect of the same premises under an assured tenancy under the HA 1988. I have explained in summary earlier in this judgment the scheme of schedule 10. I have also explained that provisions for rent reviews and fixing the rent often provide for a tenant’s improvements to be disregarded in the interests of fairness to the tenant. But there is no uniform rule on this. Even where provision is made, it may not cover all the improvements which the tenant has made: see, for example, Trustees of Henry Smith’s Charity v Hemmings (1982) P & CR 377 and East Coast Amusement v British Transport Board [1965] A.C. 58. The scope of one disregard may be different from the next. I have also already explained that under Part I of the 1954 Act a tenant’s improvements would have been disregarded in determining the rent.

However, if improvements are to be disregarded under the new form of tenancy that Mrs Hughes now has, that result has to be achieved on the interpretation of schedule 10. The provisions which generally apply to assured tenancies do not permit improvements made by a tenant under a previous tenancy of the same premises to be disregarded, unless that tenancy was an assured tenancy: see section 14(3) of the HA 1988, set out above. Nor does section 14 of the HA 1988 provide for improvements done by the tenant prior to the inception of his tenancy to be disregarded.

The skilful submissions of Mr Martin Rodger QC, for Mrs Hughes, have therefore been directed to the issue of interpretation. Indeed his argument on this appeal must stand or fall on the correctness of his submissions on the interpretation of schedule 10. He points to the anomaly that, if the judge is right, then in this case the disregard is only for the first 12 months of the new assured tenancy held by Mrs Hughes, and for the purposes of the interim rent while the terms of the new tenancy are being worked out. This approach, he submits, is without precedent. The anomaly is all the greater, on his submission, when one takes into account the facts that (1) schedule 10 was intended to enable tenancies subject to Part I of the 1954 Act to be replaced by assured tenancies and (2) the approach both in the Rent Act 1977 and the 1954 Act was to disregard the tenant’s improvements done under the same or an earlier contractual tenancy. Mr Rodger also submits that it is possible to construe schedule 10 to permit a fair and logical treatment of improvements and avoid retrospectively disadvantaging tenants through the loss of the earlier indicated disregard.

Mr Rodger submits that it is not necessary to show that Parliament made a mistake, thus distinguishing cases such as Inco Europe v First Choice Distribution [2000] 1 WLR 586. His submission is that it is difficult to believe that Parliament intended to take away from tenants the right to a disregard of improvements when fixing the rent after the first year of their new tenancies and, accordingly, if there is another construction, that should in fairness to the tenant be adopted. The court should prefer an approach which is both consistent with the earlier legislation and achieves a result which is consistent through the life of the tenancy. He submits that such an approach is open to the court.

Mr Rodger’s solution is to read paragraph 9 of schedule 10 as establishing a framework or set of principles that will continue to apply throughout the life of the new assured tenancy. That paragraph (which is set out in paragraph 11 of this judgment) provides, first and foremost, for the new assured tenancy to come into being and its attributes: the tenant’s right to possession is under paragraph 9(1) to depend on this new tenancy and so that is an indication that paragraph 9 is to lay down the principles that apply throughout the tenancy. One of those principles thus established is to be found in paragraph 9(2)(e), which contains the principle that the rent should be determined in accordance with paragraphs 10 to 12. By implication, the rent is not to be determined in accordance with sections 13 and 14 of the HA 1988 if that is inconsistent with paragraphs 10 to 12 of schedule 10.

The words “in accordance with”, on Mr Rodger’s submission, support this approach. Moreover paragraph 9(e) refers to “rent” not just “initial rent”. This would be so even though the machinery in sections 13 and 14 of the 1988 Act could also be invoked after the first year of the tenancy. However, submits Mr Rodger, those sections would have to be given effect in accordance with the principles laid down by paragraph 9(2)(e). He submits that a determination under section 14 coupled with the obligations provided for in paragraph 11 satisfies paragraph 9. This approach would incidentally entail treating the heading to paragraphs 10 to 12, which reads “Initial rent under and terms of assured periodic tenancy”, as not describing the full scope of paragraphs 10 to 12, but that word appears only in the heading and not an operative provisions of paragraphs 10 to 12.

Mr Phillip Rainey QC, for Borodex, submits that the relevant provisions are clear and unambiguous, and that they bear the meaning placed on them by the RA committee. In those circumstances, there is, on his submission, no principled basis for approaching construction, as Mr Rodger seeks to do, with a view to achieving that which is said to be likely to have been the intention of Parliament to produce a particular result different from that shown by the clear wording. As Lord Hoffmann, delivering the judgment of the Board, held in Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988 at paragraph 16, the court “cannot introduce terms to make [a contract, statute or articles of association] fairer or more reasonable. It is concerned only to discover what the instrument means.” In any event, although there is a broad agreement on the approach to excluding a tenant’s improvements, there is no single way of dealing with them. It is, moreover, not axiomatic, on his submission, that the exclusion of a tenant’s improvements carried out under an earlier tenancy is required in order to achieve fairness because the tenant was able to move into a new statutory regime which gave him a measure of security of tenure.

Mr Rainey submits that paragraph 9 of schedule 10 is merely dealing with the immediate position that arises immediately following the end of the long residential lease. It is creating a situation in which the terms of the new assured tenancy can either be agreed or fixed by the RA committee. Seen in that way, paragraph 9 clearly has no ongoing effect. This was a new regime, and there were departures from the protection previously granted under the 1954 Act. Indeed Mr Rainey submits that the new regime was substantially less favourable and that the court should not make the assumption that the new regime was intended to be as favourable as the old regime.On Mr Rainey's interpretation it follows that paragraph 11 can only apply to the determination of rent immediately after the new assured tenancy taking effect under paragraph 9 was created. Paragraph 11 incorporates section 14 with specified modifications. If Parliament had intended that sections 13 and 14 should bear the interpretation for which Mr Rodger contended, it would logically have amended sections 13 and 14 for this purpose too.

I now come to my conclusions. The essential question is one of interpretation in accordance with well-established principle. I agree with Mr Rainey that it is not open to this court to adopt Mr Rodger’s interpretation on the basis that it is a permissible interpretation and that it should be preferred because it meets the objections which I have set out above to the omission of the protection of the disregard once the landlord is able to operate sections 13 and 14 of the HA 1988. As I see it, the effect of paragraphs 9 and 11 in their form and context in relation to rent is clear. They provide a means of fixing the initial rent. Their function is thus limited to that of enabling the rent to be fixed at the outset. Once the initial terms, including rent, are fixed, these paragraphs are spent, and it is open to the landlord to serve a notice and start the procedure for fixing a new rent, when he is entitled so to do, under the provisions of section 13 of the HA 1988.

Furthermore, it is in my judgment impossible to read sections 13 and 14 as providing for the assessment of rent on the principles laid down by paragraph 9(2)(e) of schedule 10 of the LGHA 1989. If that were the intention of Parliament, there would have been some indication of that inserted into in sections 13 and 14 of the HA 1988 at the time of the LGHA 1989. Sections 13 and 14 provide a complete code for the notices to which they apply and there is no warrant to read in a further principle deduced from schedule 10.

It is, moreover, unusual, though not unknown, for a statute to set out principles rather than operative provisions. One would expect it to be made clear that, or the extent to which, a particular provision laid down a principle and not an operative provision, and how that principle was to relate to other operative provisions. Here, if paragraph 9(2)(e) lays down an overriding principle, it contradicts the express provisions of section 14(3) of the HA 1988. I have already explained that it applies only to improvements which the tenant has carried out under the new assured tenancy or some previous assured tenancy. It also only applies to improvements carried out in the previous 21 years whereas a long residential tenancy may have been for a greater term of years than this and improvements may have been made at any time during that tenancy. The absence of guidance on such points in either the LGHA 1989 or the HA 1988 is, in my judgment, a strong indication that the interpretation urged on us by Mr Rodger is not correct.

Another indication that his interpretation is not correct is that it involves the conclusion that paragraph 9(2)(e) gives effect without distinction to paragraphs 10 to 12 of schedule 10, which on this interpretation enacts both principles and operative provisions. It draws no distinction between the two types of provisions and gives no indication that there are provisions of both these types. For example, paragraph 11(5) provides that the RA committee is to determine the monthly rent at which it considers that the premises might reasonably be expected to be let in the open market under an assured tenancy “which begins on the day following the date of termination". This provision of paragraph 11 cannot be read as stating a principle, whereas on Mr Rodger’s interpretation the disregard of improvements is to be read as a principle applicable throughout the life of the assured tenancy.

Furthermore, if Mr Rodger’s interpretation is correct, the heading to paragraphs 10 to 12 of schedule 10 is a materially incomplete statement of the scope of the provisions of those paragraphs. His interpretation must involve that conclusion. It seems to me that the heading is in fact an indication that the correct way of reading paragraph 9 is that it applies to that moment in time when the long residential tenancy, to which Part I of the 1954 Act applies, expires: it fills that void. Paragraphs 10 to 12 enable flesh to be put upon the bones of the newly arising statutory tenancy, which, under certain conditions, Parliament permits to come into effect before its terms have been fully ascertained.

Paragraph 9(2)(e) of schedule 10 introduces not just the provisions of paragraph 11 relating to rent but also the other provisions of paragraphs 10 and 12. It is not clear to what extent Mr Rodger contends that those other provisions have a continuing effect. If they do, then there are other instances of contra-indication. For instance, paragraph 12(2) recognises that the parties should be free to agree terms in substitution for the statutorily imposed terms, but paragraph 12 (2) requires that agreement to be "before the tenancy takes effect in possession". If this provision also expresses a principle, then the principle is inconsistent with the way that the subparagraph has been enacted. The wording of the paragraph 12(2) thus provides further support for the conclusion that schedule 10 merely applies in the period immediately after the creation of the new assured tenancies and not throughout their duration.

I would also accept the submission of Mr Rainey that it is not for us to assume that Parliament necessarily intended to produce the opposite result with regard to improvements. The mere fact that we have not been shown any published explanation as to the policy reason for the change in the treatment of improvements does not mean that there was no reason for this. It is possible that in the sensitive area of the supply of rented accommodation there was a specific reason for making this change. It is of course open to Parliament to ameliorate the position (to some extent) by raising the limit on annual rent for the purpose of the qualifying conditions for assured tenancies.

For these reasons, I would dismiss this appeal.

I agree.

I also agree.