Craftrule Ltd v 41-60 Albert Place Mansions (Freehold) Ltd

This is an appeal from the order of Henderson J made on 27 May 2010 dismissing the appeal of Craftrule Ltd against the order of HH Judge Madge sitting in the Central London County Court. It is therefore a second appeal. It raises a point of statutory construction as to the meaning of the words ‘a self- contained part of a building’ in sections 3 and 4 of the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act). Rimer LJ gave permission to appeal as he considered that the issue raised an important point of principle which this court ought to consider.

The appellant, Craftrule Ltd, is the owner of the freehold reversionary interest in the premises known as 41- 60 Albert Palace Mansions, Lurline Gardens, London, SW11 4DQ (the property). The respondent is a limited company set up for the purpose of purchasing the freehold of the property pursuant to the enfranchisement provisions within the 1993 Act. It is controlled by the leasehold tenants of the flats comprising the property and is their nominee purchaser for the purpose of their claim for enfranchisement.

Part 1 Chapter 1 of the 1993 Act provides for the collective enfranchisement of flats by qualifying tenants. For the purposes of this appeal, the essentials are that, pursuant to section 13 of the Act, a group of long lease-holding tenants holding not less than half the flats within the premises concerned may serve a notice on the landlord seeking to acquire the freehold. The premises concerned must be a self-contained building or part of a building, as defined in section 3 of the Act. Section 3 is headed ‘Premises to which this Chapter applies’ and provides:

(1)

Subject to section 4, this Chapter applies to any premises if-

(a)

they consist of a self-contained building or part of a building…

(b)

they contain two or more flats held by qualifying tenants; and

(c)

the total number of flats held by such tenants is not less than two thirds of the total number of flats contained in the premises.

(2)

For the purposes of this section a building is a self- contained building if it is structurally detached, and a part of a building is a self-contained part of a building if -

(a)

it constitutes a vertical division of the building and the structure of the building is such that that part could be redeveloped independently of the remainder of the building: and

(b)

the relevant services provided for occupiers of that part either –

(i)

are provided independently of the relevant services provided for occupiers of the remainder of the building, or

(ii)

could be so provided without involving the carrying out of any works likely to result in a significant interruption in the provision of any such services for occupiers of the remainder of the building.”

Section 4 of the Act provides for certain exclusions from the right to enfranchisement but it is common ground that none of them applies in the present case.

The property forms part of a terraced building comprising 160 flats, built in the late 19^th or early 20^th century. The building consists of eight ‘handed pairs’. Each ‘pair’ comprises 20 flats, arranged on 5 floors. The property comprises one such pair consisting of 20 flats, numbers 41-60, situated roughly in the middle of the terrace. Each half of the pair has a separate entrance leading to separate common parts and staircases. There is a dividing wall between each half (and the adjacent parts of the building) which is vertically continuous from the footings to roof level. Each half has its own drainage system, mains water riser, electricity supply and entry phone. Telephone and cable TV services are provided to individual flats although the cables are bundled together. There are no other communal services. Each half of the pair could be redeveloped independently of the other half of the pair and/or of the rest of the building. All the flats in the property save for numbers 41 and 50 are demised under long residential leases for a term of more than 21 years. The service charge provisions in the leases are defined by reference to the whole property (flats 41-60).

Save in one respect, it is not disputed that the whole property (flats 41-60) satisfies all the requirements of section 3 as set out above. The only issue which the appellant raises is that the property is not ‘a vertical division of the building’. It contends that it is two vertical divisions of the building. However, it is agreed that each half of the pair (41-50 and 51-60) would independently satisfy all the requirements of section 3. I interpose to say that, in my view, the expression ‘vertical division’ is rather odd. A division is a line of no thickness. It seems to me that what section 3(2)(a) means is that the premises must be a vertical slice of the building.

Section 13(1) of the 1993 Act provides that a claim for enfranchisement is to be made by the giving of a notice to the landlord. By section 13(2) the notice must be given by the qualifying tenants (viz tenants with long leases) of not less than half of the total number of flats within the relevant premises. In March 2008, a group of ten long leasehold tenants (the participating tenants) gave notice pursuant to Section 13 claiming the right to acquire the freehold reversionary interest in the whole property (flats 41-60). Seven of “the participating tenants” lived in the 51- 60 half and only three lived in the 41-50 half. The landlord failed to issue a counter-notice as it could have done pursuant to section 21 of the 1993 Act. The result was that, unless the notice were to be declared invalid, “the participating tenants”, through their nominee purchaser, would be entitled to purchase the freehold on the terms set out in the notice.

A dispute arose between the parties as to the validity of the notice and the tenants commenced proceedings in the Central London County Court seeking a declaration pursuant to section 25 of the Act that their notice was valid and that they were entitled to acquire the freehold on the terms proposed. It was common ground that the notice was valid subject to the one issue which remains for determination on this appeal. The landlord contended that it was not open to the tenants to seek to enfranchise the whole property, that is, all 20 flats, by the issue of one notice. It argued that the right to enfranchisement attaches only to the smallest possible self-contained part of a building. As each half of the pair is a self-contained part of a building, each half must be the subject of a separate claim and notice must be given by qualifying tenants of at least half the flats in that half of the pair.

HH Judge Madge rejected that submission and held that the notice in respect of the whole property was valid. The same arguments were deployed before Henderson J on the first appeal. He dismissed the appeal, taking the same view for much the same reasons as those given by Judge Madge.

The basis of Henderson J’s decision was that the statutory language of section 3 was clear and unambiguous. It permitted the enfranchisement of any self-contained part of a building (subject to the exclusions in section 4 which did not apply). There was nothing within the section which suggested that the right attached only to the smallest possible self-contained part. If Parliament had intended to oblige tenants to claim the smallest part of the building to satisfy the requirements of section 3(2) it would have said so. He was satisfied that this construction was consistent with the statutory purpose of the scheme, as identified in Majorstake Ltd v Curtis [2008] 1 AC 787 at paragraphs 21 and 23. Moreover, this construction of section 3 derived support from other provisions of the Act, in particular subsections 13(8), (9) and (10) and section 4(3A). He rejected the submission advanced by Mr Kenneth Munro for the landlord that there was authority, which although not directly in point, was of assistance. The judge regarded those cases as irrelevant. Further he rejected Mr Munro’s invitation to have regard to certain passages from the speeches of Lord Strathclyde taken from Hansard. The judge said that there was no ambiguity in the statutory words to justify such a course. In any event, having read the passages de bene esse, the judge did not think that they were capable of resolving any supposed ambiguity.

Rimer LJ gave permission for this second appeal because the issue is of some general importance on which there is no direct authority.

In outline, Mr Kenneth Munro, (counsel for the landlord in this court and below) submitted that Henderson J had erred in several respects. He had been wrong to reject the authorities cited as irrelevant. He should not have refused to have regard to the Hansard extracts. He had failed to deal with the submissions advanced as to the implications of the decision. Mr Munro submitted that the construction accepted by the judge would have a most undesirable effect. It would enable a group of tenants to enfranchise a part of a building in which they had no financial interest against the wishes of the tenants in that part.

Mr Philip Rainey QC (counsel for the tenants here and below) submitted that the judge had been right in all respects for the reasons he gave. In particular, he had been right to rely on subsections (8), (9) and (10) of section 13 and section 4(3A).

I will begin by considering subsections (8), (9) and (10) of section 13. These provide:

(8)

Where any premises have been specified in a notice under this section, no subsequent notice which specifies the whole or part of those premises may be given under this section so long as the earlier notice continues in force.

(9)

Where any premises have been specified in a notice under this section and –

(a)

that notice has been withdrawn ….., or

(b)

…..

no subsequent notice which specifies the whole or part of those premises may be given under this section within the period of twelve months beginning with the date of withdrawal or….

(10)

In subsections (8) and (9) any reference to a notice which specifies the whole or part of any premises includes a reference to a notice which specifies any premises which contain the whole or part of the premises; and in those subsections “specifies’ means specifies under subsection (3)(a)(i).

These provisions appear to envisage that a notice which specifies a self-contained part of the building (the whole of the relevant premises which I will call X) may be later replaced by a notice which specifies a different self-contained part of the building (which I will call Y) where Y is only a part of X. In that event, Y is necessarily a smaller part of the building than X. Therefore if notices in respect of both X and Y are potentially valid, it follows that a self-contained part of a building (for the purposes of section 3) cannot be limited to the smallest possible self-contained part.

Mr Munro argued in response that the expression ‘part of those premises’ in section 13(8) is intended to relate to a part of the premises such as appurtenant garages or walkways which may have been included in the ‘larger’ self- contained part of the building but which may be hived off and excluded from the specified premises in a later notice. This, he said, is intended to give tenants the choice whether they enfranchise just the flats themselves or whether they include associated premises such as garages and walkways. The power of choice appears to derive from section 1(5) of the 1993 Act which provides that qualifying tenants may exercise their right of enfranchisement in relation to any premises despite the fact that those premises are less extensive than the entirety of the premises in relation to which those tenants are entitled to exercise the right.

I would accept that that subsection gives the tenants the choice to which Mr Munro refers. But it also enables them to choose whether to specify a larger or smaller self-contained part of a building, provided that they would be entitled to seek enfranchisement of either. The smaller part must be self-contained if it is to support a claim but the provisions plainly envisage that the claim may be made in respect of a larger self-contained part of the building, provided that there are enough qualifying tenants who agree to participate. In my judgment, Mr Munro’s submission, while not incorrect in itself, does not take the argument any further. It appears to me that sections 13(8),(9) and (10) provide powerful support for Mr Rainey’s argument.

The other statutory provision upon which Henderson J relied is section 4(3A) which was introduced into the 1993 Act by amendment in 1996. Prior to the amendment, section 3(1)(a) contained an additional requirement that the freehold of the whole of the building or self-contained part of the building should be owned by the same person. It was found that some landlords were avoiding enfranchisement by hiving off the freehold of small parts of the premises to another landlord, usually an associated company. So, in 1996, that additional requirement was repealed and a new exclusion clause was inserted in section 4 as follows:

4 Premises excluded from right

…

(3A) Where different persons own the freehold of different parts of the premises within subsection (1) of section 3, this Chapter does not apply to the premises if any of those parts is a self-contained part of a building for the purposes of that section.

Mr Rainey’s submission in respect of this subsection was that this additional exclusion would have been wholly unnecessary if a valid notice could only be served in respect of an indivisible self-contained part of the building. The freehold of that indivisible self-contained part would inevitably be held by one landlord. The implication of this provision is that a self-contained part of a building may well contain two or more self-contained parts.

Mr Munro made two submissions on this point. First, he submitted that it was not permissible to have regard to this amended provision in construing the words of the original statutes: see Attorney General v Lamplough (1878) 3 Ex D 214. Second, if that is wrong, section 4(3A) does no more than show that Parliament wanted to clarify the position in relation to blocks of flats where the freehold is split between owners and says nothing about the position where (as here) the freehold of the relevant premises is in single ownership. In my view, it is permissible to have regard to this amendment which became necessary once the additional requirement (which had been abused) was removed from section 3 in order that it could be made clear that enfranchisement was available only in respect of a self-contained part of a building the freehold of which was in single ownership. I share the view of Henderson J that this provision provides support for the tenants’ contention.

In my judgment, sections 4(3A) and 13(8), (9) and (10) taken together are conclusive of the true construction of the expression ‘self-contained part of a building’ within section 3(1). I can see no justification for putting a gloss on the clear statutory words so as to require that a self-contained part must be the smallest possible self-contained part.

I can deal with Mr Munro’s other arguments quite briefly. I reject his submission that assistance is to be derived from Oakwood Court (Holland Park) Ltd v Daejan Properties Ltd [2007] 1 EGLR 121. There a claim for enfranchisement of several flats (being part of a building) failed; the part was not self-contained because it shared the services of a boiler-house with the other flats. The case was not concerned with the divisibility of a self-contained part of a building and said nothing of assistance to the present issue. Similarly, Holding Management (Solitaire) Ltd v Finland Street 1-16 RTN Co Ltd [2008] 1 EGLR 107 is of no assistance. It concerned the right of tenants to manage part of a building in which their flats were located pursuant to the Commonhold and Leasehold Reform Act 2002. The statutory provisions are similar to those of the 1993 Act and the question arose as to whether the part of the building in question complied with the requirement of the equivalent of section 3(2)(a) of the 1993 Act. The problem was that the dividing line between the premises and the rest of the building was not vertical the whole way down; part of the dividing line was lateral. The case was not concerned, as we are, with the divisibility of a self-contained part where the verticality of the division is not in issue.

Mr Munro also sought to rely on Denetower Ltd v Toop [19911 WLR 945, Kay Green and Others v Twinsectra Ltd [1996] 1 WLR 1587 and Long Acre Securities Ltd v Karet [2004] EWHC 442 (Ch), [2005] Ch 61. These were all cases under the Landlord and Tenant Act 1987 relating to a tenant’s right of first refusal to purchase the freehold which the landlord wished to sell. The statutory provisions are similar but not identical to those of the 1993 Act but in any event the issues decided in those cases bore no relation to the issue in the present case.

I would also reject Mr Munro’s submission that the construction favoured by the judge would have wide implications including undesirable and unintended consequences. His complaint is that, if a self-contained part of a building can include two or more smaller self-contained parts, the right to enfranchisement will or might be exercisable by tenants who do not have any financial interest in the other part. Take for example the situation in the present property and a proposal to claim enfranchisement of the whole property comprising 20 flats. If all the tenants of flats 51- 60 were in favour of the proposal and all those in 41-50 were against it, those in favour could impose their will on the others, even though they had no financial interest in flats 41-50. Even worse, says Mr Mr Munro, if the whole building of 160 flats had but one freehold owner (which in fact it does not), it would be possible for the tenants of flats 1-80 to impose their will on those in flats 81-160 even though all the latter were opposed. I must say that these circumstances seem unlikely to occur but I accept that hypothetically they are possible. I cannot see any reason why such a situation should be regarded as so undesirable that one should infer that Parliament cannot have intended it to occur. It is obvious that Parliament envisaged that 50% of the tenants within any self-contained part of the building might be unwilling to join in the enfranchisement. That could be so, even if Mr Munro is correct that the right of enfranchisement attaches only to the smallest possible self-contained part of the building. I cannot see that there is anything more undesirable in imposing a new landlord on 10 unwilling tenants out of 20 than there is in imposing it on 5 tenants out of 10. In my view, it is clear that Parliament thought that there were real advantages to tenants if they were able to enfranchise and that those advantages should not be lost merely because there were some unwilling tenants. Those advantages are explained in the passage from Majorstake to which Henderson J referred.

I come finally to Mr Munro’s submission that the expression ‘a self-contained part of a building’ is ambiguous and that we should resolve the ambiguity by reference to the speech of Lord Strathclyde during a debate in Committee in the House of Lords on 9 March 1993. We are entitled to look at Hansard as an aid to construction only if the legislation is either ambiguous or obscure or leads to an absurdity: see Pepper v Hart [1993] AC 593. In my judgment, on the ordinary natural meaning of the words, the expression ‘self-contained part of a building’ in section 3 includes a self-contained part of a building which is itself capable of being divided into smaller self-contained parts of a building. The words are neither ambiguous nor obscure. Nor does such a meaning lead to absurdity. I would hold that we are not entitled to have regard to Lord Strathclyde’s speech.

In the course of argument, we examined, de bene esse, the extract from Hansard on which Mr Munro sought to rely. I do not propose to quote it. It does not appear to me that these passages would resolve the ambiguity if one existed.

Lord Strathclyde was responding to three quite technical amendments. Amendment 13 proposed that the criterion for establishing viability in respect of the provision of services should be changed. In the bill, a self-contained part of a building could be enfranchised only if it were possible to separate services from the remainder of the block without significant disruption to the rest of the block. The amendment proposed would prevent separate parts of the building being enfranchised unless separation of services could be achieved without significant costs. In explaining why the Government would not wish to adopt that amendment, Lord Strathclyde said that it was intended that enfranchisement should be exercisable over the smallest viable unit. He feared that the proposed amendment might make this more difficult because it might mean that a larger unit had to be purchased. He said nothing to suggest that tenants who chose to enfranchise a larger unit would not be permitted to do so, provided of course that there were enough of them within that unit who wished to do so.

In respect of amendments 14 and 15, the concern raised appears to have been for the position of those tenants who were left outside the enfranchised part of the building, although this is not entirely clear. Lord Strathclyde again said that the bill provided that the smallest viable unit could be enfranchised. He said that this would ensure that that leaseholders could only enfranchise the property in which they had an immediate financial interest. He did not say that only the smallest viable unit could be enfranchised. I do not find it at all easy to understand exactly what he meant by saying that allowing the enfranchisement of the smallest viable unit would ensure that leaseholders could only enfranchise the property in which they had an immediate financial interest. The requirement that there should be a certain proportion of tenants participating in the purchase must be enough to ensure that they have an immediate financial interest, whether the unit under consideration is the smallest viable unit or two or more self-contained viable units which, taken together, are also a viable self-contained unit. Accordingly, I do not think that the passages relied on by Mr Munro would resolve any ambiguity, if there were one.

For those reasons, I would dismiss this appeal and uphold the declaration made by HH Judge Madge.

I agree.

I also agree.