Free Grammar School of John Lyon v Helman

This appeal raises a question as to the validity of a notice claiming to exercise the right of enfranchisement in respect of a house given by Part I of the Leasehold Reform Act 1967 (‘the 1967 Act’). The notice was given in the course of this sequence of events. Following his registration as the proprietor of a long lease of the house, the tenant charged the house to a lender, which granted a sub-charge under which the sub-chargee could appoint receivers with wide powers to give notices in the tenant’s name in respect of the house. The tenant was adjudicated bankrupt and a trustee in bankruptcy appointed. The sub-chargee appointed receivers, following which the trustee disclaimed the lease. The receivers then served on the landlords a notice in the bankrupt’s name claiming the freehold under the 1967 Act. The landlords challenged the notice on the grounds that (i) upon the tenant’s bankruptcy the tenancy vested in his trustee; (ii) it followed that at the date of the notice the bankrupt had not been the tenant ‘for the last two years’; and (iii) that meant that the condition for enfranchisement prescribed by section 1(1)(b) of the 1967 Act was not satisfied; alternatively, (iv) the giving of the notice was precluded by the disclaimer.

The validity of those assertions came for decision before Her Honour Judge Deborah Taylor in the Central London County Court. By her order of 11 April 2013, made following her judgment of 19 March, the judge rejected the landlords’ case, held the notice to be valid and that the claimant, Mr Sacha Helman, to whom the receivers had sold the lease and assigned the benefit of the notice, was entitled to acquire the freehold.

The judge gave the landlords, The Keepers and Governors of the Possessions, Revenues and Goods of the Free Grammar School of John Lyon, permission to appeal. They were represented before us by Mr Radevsky and Ms Allsop; the respondent, Mr Helman, was represented by Ms Holland QC. Ms Allsop appeared below but Mr Radevsky and Ms Holland did not.

These are not in dispute and I have given their essentials. The fuller version is as follows. On 21 November 1951, the landlords granted Ms Gretor a 99-year lease of a house at 18 Hall Road, Maida Vale, London NW8 (‘the house’). The landlords’ title to the freehold is registered at HM Land Registry. The title to the lease is also registered. The lease was in due course assigned to Peter Terence James, who was registered as proprietor on 24 October 2002.

By a registered charge dated 21 June 2007, Mr James charged the house to Excel Securities PLC (‘Excel’) by way of legal mortgage securing the payment to Excel of a principal sum of £2.25m and other liabilities. Clause 7 provided for the security to be immediately enforceable, and for the power of sale and other powers conferred by section 101 of the Law of Property Act 1925 to be immediately exercisable, at any time after the secured liabilities had become due and remained unpaid. The section 101 powers include a power to appoint a receiver of the income of the house. Section 109 provides:

Upon the security becoming enforceable, Excel was, by clause 9.1 of the charge, entitled to appoint one or more receivers of the security assets. Clause 10.6 empowered such a receiver to do various things, including selling the house, and clause 10.12 empowered him to do all other things he might consider desirable or necessary for realising the security. Clause 14, ‘Further Assurances’, required Mr James to take whatever action Excel or a receiver required in relation to the effecting, protecting or realisation of the security including, by clause 14.1.3, ‘the giving of any notice … which … the Lender may think expedient’. Clause 15, ‘Power of Attorney’, provided:

On the same day as the grant of the charge, Excel granted a registered sub-charge to Bank Leumi (UK) plc (‘the bank’). The sub-charge took effect as a charge of ‘the Charge … and the principal monies secured by the Charge and all interest… and the benefit of all securities for the payment thereof with payment to [the bank] of the monies and liabilities secured by a [mortgage debenture dated 28 February 2006]’. The bank had, in relation to the property subject to the charge, the same powers as Excel: see section 53 of the Land Registration Act 2002 (‘the 2002 Act’).

Mr James was adjudicated bankrupt by an order of 29 October 2009. On 6 November 2009, and pursuant to section 86(4) of the 2002 Act, the registrar entered a bankruptcy restriction on the proprietorship register of Mr James’s title to the house that provided that no disposition was to be registered until Mr James’s trustee in bankruptcy was registered as proprietor. Paul Davis was appointed as his trustee in bankruptcy on 28 January 2010 but was not registered as the proprietor of the house.

On 19 October 2010, the bank appointed Jon Gershinson and Ania Packman of Allsop LLP as joint receivers of the house and other rights and assets charged by the charge and sub-charge. It is not disputed that the power to appoint a receiver under the charge had become exercisable, or that the appointment conferred upon the receivers the powers described by the charge.

On 23 February 2011, Mr Davis filed at the High Court a notice under section 315 of the Insolvency Act 1986 (‘the 1986 Act’) disclaiming ‘all my interest in [the house]’.

On 7 December 2011, the receivers entered into an agreement with the claimant/respondent, Mr Helman, for the sale of the house. The agreement was made between (1) Mr James, (2) the receivers and (3) Mr Helman. The receivers signed the agreement on Mr James’s behalf pursuant to the power of attorney conferred by the charge.

On the same day, pursuant to clause 18 of the sale contract and at the request of Mr Helman, the receivers served the landlords with a notice claiming the freehold of the house. The notice was in Form 1 of the Schedule to the Leasehold Reform (Notices) (Amendment) (England) Regulations 2002, as amended. It was signed by the joint receivers, whom the notice described as ‘appointed … by [the bank] pursuant to section 109 of the Law of Property Act 1925 and in accordance with the provisions of [the sub-charge].’ It was stated to be given ‘on behalf of Peter Terence James (Tenant)’ and paragraph 1 asserted that ‘I am the tenant of the house …’.

The sale to Mr Helman was completed on 8 December 2011 when (i) the house was transferred to him against the payment of £1.91m, and (ii) the benefit of the notice claiming to acquire the freehold of the house was assigned to him for £1. The transferor and assignor in each case was Mr James, on whose behalf the receivers executed the documents. Mr Helman was registered as the proprietor of the lease of the house on 17 February 2012.

Whilst the landlords accept that if Mr Helman remains the tenant of the house until after 17 February 2014, by when he will have been a tenant for two years, he will be entitled to claim the freehold of the house under the 1967 Act, they dispute that the notice served on 7 December 2011 was a valid notice, or therefore that its assignment to Mr Helman gave him anything of value. The issue before Judge Taylor was as to whether the notice was valid.

The Leasehold Reform Act 1967

Section 1(1) of the 1967 Act gives ‘a tenant of a leasehold house’ a right to acquire on fair terms the freehold in circumstances in which the tenancy is a ‘long tenancy’ and other conditions are satisfied, including by section 1(1)(b) that ‘at the time when he gives notice in accordance with this Act of his desire to have the freehold … he has (i) … been tenant of the house under a long tenancy for the last two years; …’.

There is no dispute that immediately before he was adjudicated bankrupt in 2009 Mr James, who had by then been the tenant of the house for seven years, was or would have been qualified under the 1967 Act to give a notice claiming the freehold. The question is as to the effect his bankruptcy had upon his right to do so. That requires a consideration of the 1986 Act and the 2002 Act.

The Insolvency Act 1986

Section 306(1) provides that ‘the bankrupt’s estate shall vest in the trustee immediately on his appointment taking effect…’. Section 306(2) provides that any property so vesting ‘shall so vest without any conveyance, assignment or transfer’. Section 283 provides, subject to immaterial exceptions, that a ‘bankrupt’s estate’ comprises all property belonging to or vested in the bankrupt at the commencement of his bankruptcy. Mr James’s property included his lease of the house and so, upon the appointment of the trustee taking effect, the lease vested in the trustee.

Section 315(1) empowers a trustee to disclaim ‘any onerous property’. It is not in question that the lease of the house was such property and that it was open to the trustee to disclaim it, as he did by his notice filed on 23 February 2011. Section 315(3) provides, however, that:

The Land Registration Act 2002

Part 3 of the 2002 Act, comprising sections 23 to 31, is headed ‘Dispositions of Registered Land’ and sections 23 to 26 are in a sub-part headed ‘Powers of disposition’. Section 23 describes the ‘owner’s powers’ in relation to a registered estate and charge by explaining the dispositive powers, and the limits on them, that an owner has. Section 24 provides that a person is entitled to exercise such dispositive powers in relation to a registered estate or charge if he is ‘(a) the registered proprietor, or (b) entitled to be registered as the proprietor.’

The next sub-part, ‘Registrable dispositions’, comprises section 27, which is headed ‘Dispositions required to be registered’ and provides materially:

Sub-section (5) is of particular relevance. Its sense is that, subject to the three exceptions, dispositions by operation of law are registrable dispositions. That means that, save in the three exceptional cases, a disposition by operation of law will not operate at law until the disponee’s title is registered. In the case, however, of the three exceptions such a disposition will operate at law immediately, without any need for a registration of the disposition. In the case of a bankruptcy, where there will be a disposition by operation of law of the bankrupt’s estate to his trustee in bankruptcy (section 306 of the 1986 Act), section 27(5)(a) shows that such a disposition operates at law. In that respect, section 27(5)(a), as regards bankruptcy, mirrors section 306(2). That does not mean that the trustee in bankruptcy is not entitled then to apply to bring the register up to date by having himself registered as the proprietor in place of the bankrupt. He is so entitled, as is provided for by paragraphs 5(b) and 7 of Schedule 4 to the 2002 Act and by rule 168 of the Land Registration Rules 2003 (SI/2003/1417). Like provisions apply in the case of dispositions upon death by operation of law to personal representatives.

Part 6 of the 2002 Act is headed ‘Registration: General’, and section 58, ‘Conclusiveness’, provides:

Finally, section 86, ‘Bankruptcy’, provides materially:

The judge identified as follows the three issues she had to decide. (i) Apart from the effects of the bankruptcy and the disclaimer, did the receivers have the right to sell the lease and give a notice claiming the freehold under the 1967 Act? (ii) What was the effect of the bankruptcy on those rights? (iii) What was the effect on them of the disclaimer? The judge answered the first question in the affirmative and Mr Radevsky did not argue the contrary to us.

As for question (ii), the judge recorded the landlords’ submission that the effect of the bankruptcy was to divest Mr James of his tenancy of the house, and so result, by the time of the giving of the notice in his name, in a failure of the ‘two year’ condition in section 1(1)(b) of the 1967 Act. Mr Helman’s counter argument was that the property rights of Mr James that vested in the trustee were subject to the prior rights granted to Excel, the bank and the receivers under the charge and sub-charge; and that as those rights included the right on part of the receivers to give a notice under section 1 of the 1967 Act, they could not be affected by the bankruptcy. The judge did not answer question (ii) separately, but conflated her answer to it with that to question (iii). Her conclusion was that the property vesting in the trustee did not include the right to give a notice under the 1967 Act on his, the trustee’s, behalf, nor was the trustee entitled to disclaim the tenancy insofar as it affected the giving of notice by the receivers to acquire the freehold. She held, therefore, that the receivers’ right to serve a notice in Mr James’s name, like their power of sale under the sub-charge, were unaffected by the bankruptcy and disclaimer.

Mr Radevsky’s first submission was as simple as they come. It was that which Ms Allsop advanced to the judge. The receivers’ notice claiming the freehold was given in the name of Mr James, for whom the receivers acted as agents. By the time of the notice, Mr James was no longer the tenant of the house as his tenancy had, upon the prior appointment of his trustee in bankruptcy, vested in the trustee by operation of law, and so by then the trustee was the tenant: sections 306 of the 1986 Act and 27(5)(a) of the 2002 Act. The trustee was not yet qualified to give a notice under the 1967 Act, nor anyway did the receivers’ notice purport to be given on behalf of the trustee, for whom the receivers were not agents. The result was that, as the notice was given on behalf of someone who was neither the tenant nor had been for ‘the last two years’, the enfranchisement condition prescribed by section 1(1)(b) of the 1967 Act was not satisfied and the notice was a nullity.

That submission is not just simple, it is formidable. The judge did not deal separately with it. Ms Holland, however, had to do so. Valiant though her efforts were, they did not come close to answering it.

Ms Holland had two main submissions. The first was that, under the scheme of the 2002 Act, registration is all. At all material times, including in particular when the notice was given, Mr James was the registered proprietor of the lease. It followed that, despite his bankruptcy, he either was, or must at least be regarded as having continued to be, the ‘tenant’ for the purposes of the 1967 Act, including at the time of the service of the notice. Ms Holland relied on sections 24 and 58 of the 2002 Act, which she said provided the best support for her submission. She did not, however, dispute that the effect of sections 306 of the 1986 Act and 27(5)(a) of the 2002 Act was to vest the tenancy in the trustee. Her submission, advanced with appropriate diffidence, was that the combined effect of these statutory provisions led to the conclusion that, at the time of the notice, Mr James and the trustee could each be regarded as the tenant.

I would reject that submission. The scheme of the 2002 Act is of course focussed on registration; and the person for the time being named as the registered proprietor of a legal estate in land will ordinarily not just be regarded as its owner but will be its owner. The 2002 Act shows, however, that there are exceptional circumstances in which this will not be so. Upon the death of a registered proprietor, he will be divested of the legal estate in respect of which he was so registered, which will devolve by operation of law onto his personal representatives, who will thereupon acquire the same estate, and will do so without being registered as proprietors in place of the deceased. Likewise, if the registered proprietor becomes bankrupt he will, upon the appointment of a trustee in bankruptcy, be automatically divested of his legal estate which will vest in the trustee. The bankrupt may continue to be the registered proprietor of the legal estate, but he will not continue to own it or have any continuing interest in the property of which he remains so registered as the proprietor. His entire interest will have devolved upon his trustee.

Section 24 does not assist Ms Holland. It explains no more than that the registered proprietor ‘is entitled to exercise owner’s powers in relation to a registered estate’, which section 23 shows means no more than that such a proprietor is empowered to make a disposition of such estate. It does not provide that the registered proprietor is in all circumstances irrefutably also the owner of the estate of which he empowered to dispose: it means no more than that his status as a registered proprietor of such estate empowers him to dispose of it elsewhere. A bankrupt who remains the registered proprietor of a legal estate which has vested in his trustee will therefore continue to have the power to dispose of the legal estate. His capacity to do so will in practice usually be hindered by the registration of the type of restriction that, pursuant to section 86(4) of the 2002 Act, the registrar entered against Mr James’s title. If, however, no such restriction is entered, a bankrupt might be able to dispose to a purchaser of the estate vested in his trustee: see section 86(5). If he can and does, that shows no more than that the scheme of the 2002 Act includes exceptions to the maxim nemo dat quod non habet.

I also do not regard section 58(1) as helping Ms Holland. It explains the circumstances in which the legal estate in land will be deemed to be vested in the registered proprietor. It does not, however, also say or mean that, if such proprietor becomes bankrupt and a trustee in bankruptcy is appointed, the estate will not thereupon devolve onto the trustee, as section 27(5) shows it will. Moreover, the words ‘If, … the legal estate would not otherwise be vested in him’ recognise that there will be cases (such as the exceptional cases recognised in section 27(5)) in which the legal estate will be vested in someone not registered as its proprietor.

Ms Holland’s second submission was that the wide powers conferred by Mr James upon Excel under the charge, and in turn upon the receivers appointed under the sub-charge, included express powers for the receivers to act as Mr James’s agents in relation to various matters relating to the protection or enforcement of the security, including the powers sell the lease and to give a notice in Mr James’s name claiming the freehold. As such agency was coupled with an interest, it was irrevocable and so survived Mr James’s bankruptcy. If, submitted Ms Holland, (and as was conceded) the receivers (if by then appointed) would have had authority immediately before Mr James’s bankruptcy to give the landlords a notice in his name claiming the freehold, and to sell the lease in his name after the bankruptcy, how can it be that, after the bankruptcy, their irrevocable authority did not also enable them to give a notice in his name claiming the freehold?

The answer is obvious. It is that whilst the charge and sub-charge conferred the widest powers upon the bank and the receivers to take steps in relation to the lease of the house, including to sell it – and, in the case of the receivers, to do so in the name of Mr James as his agents – nothing in such powers could or did enable the receivers to exercise rights in relation to the house that were not available in law to be exercised when they purported to exercise them.

The concept is not difficult. If, as an extreme example, following the grant of the charge and the appointment of receivers and before any bankruptcy Parliament had repealed the 1967 Act, it is obvious that the right of enfranchisement that the receivers could have exercised in Mr James’s name immediately before the repeal could not have been exercised afterwards. That is because such a right was no longer available to be exercised. The like applied here. The receivers wished to exercise the right of enfranchisement in Mr James’s name and as his agent, but as he no longer satisfied the ‘last two years’ temporal condition, he was not a qualifying tenant under the 1967 Act and it was not open to the receivers to claim the freehold in his name. Their bid to do so was writ in water and signified nothing.

Ms Holland’s proposition that the grant of the charge in some manner gave the receivers an immutable right to enfranchise in Mr James’s name, regardless of whether or not at the time of the exercise of the right the conditions for enfranchisement could be satisfied, is therefore one I would also reject. Why Mr James and Excel were thought to be capable, by arrangements made exclusively between them, of binding the landlords to suffer the acquisition of their freehold in circumstances other than those prescribed by the 1967 Act is something Ms Holland did not explain.

Mr Radevsky had a second submission, which he advanced in case he was wrong on his first. It was that the consequence of the trustee’s disclaimer of the lease was anyway to preclude the giving of the enfranchisement notice since its giving could or might result in the imposition of liabilities upon Mr James in respect of the property disclaimed (see section 315(3) of the 1986 Act). This argument was more difficult. As I would allow the landlords’ on their first ground, there is no need, and I do not wish, to say any more about it.

I would allow the landlords’ appeal and set aside the declaration made in paragraph 2 of the order of 11 April 2013. I would invite counsel to endeavour to agree any other appropriate consequential variations to the order.

I agree.

I also agree.