Maurice & Ors v Holloware Products

The claimants in the present action are the trustees of the St Bartholomew’s and Royal London Charitable Foundation, and are the freehold owners of a building consisting of a block of 28 flats at 64 to 82 Murdel(?) Street, London E1.

The claimants are, and have been since 3 October 1944, the lessee of the entire building, including the flats, under a 80-year lease originally granted in 1937 and hence expiring in about 12 years’ time.

The defendants have served notices under the Leasehold Reform Housing and Urban Development Act 1993 requiring the grant of new long leases under the Act in respect of all 28 flats. Such new leases would run for 90 years beyond the existing unexpired term at a peppercorn rent.

The claimants originally disputed the entitlement of the defendants to the grant of the new leases on three grounds. Those have now been reduced to one, which is essentially whether the defendants are the qualifying tenant of each flat, “qualifying tenant” being a term of art which is defined in the statute.

Section 39(1) of the 1993 Act confers on the qualifying tenant the right exercisable in accordance with the provisions of the statute to acquire a new lease of the flat on payment of a premium determined in accordance with the provisions of the Act. One of these is that the tenant should have been a qualifying tenant for at least the last two years.

Section 39 incorporates section 5(1) which provides:

“Subject to the following provisions of this section, a person is a qualifying tenant of a flat… if he is tenant of the flat under a long lease.”

“A long lease” is defined in section 7 to which reference is also made in section 39 as meaning (see section 7(1)(a)) “a lease granted for a term of years exceeding 21 years”.

It is clear that the defendants satisfy these criteria of holding under a long lease and having done so for at least the last two years.

There is the extra fact in the present case on which the claimants seek to found that the defendants are tenants of more than one flat, and that they are tenants of more than one flat, and indeed of all the flats, under one lease. That situation is in fact covered in, first of all, section 39(4) which provides that:

“A person can be… the qualifying tenant of each of two or more flats at the same time whether he is tenant of those flats under one lease or under two or more separate leases.”

The claimant also draws attention to the fact that not only is the lease under which the defendants hold a lease of one or more flats, indeed of all the flats, but of the building as a whole, that is to say it extends beyond the flats to the common parts and the structure. This, again, is covered by the 1993 Act in section 101, subsection 3 which says that:

“Any reference to the lease held by a qualifying tenant of a flat is a reference to a lease held by him under which the demised premises consist of or include the flat (whether with or without one or more other flats).”

Accordingly, the defendants submit that all the requirements of a qualifying tenant are established in relation to all the flats in the present case, notwithstanding the additional matters raised by the claimants and to which I have just drawn attention.

The claimants’ submission is targeted on the fact that currently the entire building is held on one lease, whereas after the grant of new leases the result would be that there would be 28 leases of the flats, and, in addition, the existing lease insofar as it applied to the remainder of the property after the subtraction of the flats from the totality of the building.

I was taken by counsel for the claimant first of all to section 56(1)(a). This provides that: “The new lease…” - that is to say the new lease in respect of each flat:

“…to be granted to a tenant shall be a lease on the same terms as those of the existing lease as they apply on the relevant date, but with such modifications as may be required or appropriate to take account of various matters.”

That takes me back to 56(1) which provides that:

“Where a qualifying tenant of a flat has…a right to acquire a new lease of the flat and gives notice of his claim…then …the landlord shall be bound to grant to the tenant, and the tenant shall be bound to accept –

(a)

in substitution for the existing lease, and

(b)

on payment of the premium under Schedule 13 in respect of the grant,

a new lease of the flat at a peppercorn rent for a term expiring 90 years after the term date of the existing lease.”

Focusing on the word “substitution” I was further referred to paragraph 10 of schedule 11 which provides that where a lease is executed as is envisaged in the body of the Act, that should have effect:

“…as if there had been a surrender and re-grant of any subsisting lease intermediate between the interest of a competent landlord and the existing lease...”

Accordingly, counsel for the claimant says that what is envisaged is not the grant of new leases in substitution for the existing lease because the existing lease is to be left in place, at least in part. It is not being extinguished by surrender and replaced by the new leases.

He further goes on to say that even if that were not in itself sufficient objection, and even if in some kind of way it was right to regard the existing lease as remaining in being, it would be necessary for the existing lease to be modified. He says that there are no provisions in the Act for the modification of the existing lease.

Counsel for the defendants accepts that there has to be some kind of mechanism in order to ensure that the consideration payable under the existing lease is reduced so as to take account of the fact that the existing lease is no longer covering the parts of the premises which are henceforth demised under the new leases.

Originally counsel for the defendants was inclined to submit that that result could be achieved by the leasehold valuation tribunal exercising a jurisdiction under section 91 of the Act and specifically under section 91(e). However, on further reflection in the course of submissions he accepted that it was, in fact, difficult to construe that section as conferring a jurisdiction to apportion the rent previously paid under the existing lease as between the residual existing lease and the new leases.

However, he says such apportionment would occur as a matter of common law. He drew my attention to Woodfall in the current edition at paragraph 7.119. That states that “a rent is apportionable in respect of an estate at common law”, and that “the rent will be apportioned where…” and it gives a number of examples. One of them is where “the tenant surrenders part of the land to the landlord”; and the second is where “the landlord forfeits part of the land”. In such a case the rent falls to be divided or apportioned, and in default of agreement it will be for the court to determine that. Halsbury’s Laws of England in volume 27.1, paragraphs 248 and 250 makes the same point.

Accordingly, I start from the position that the Act defines in express terms who is a qualifying tenant, and in terms which are directly applicable to the situation which I have before me. I see no difficulty in interpreting section 56(1)(a) as providing that the new leases shall be granted and accepted in substitution for the existing lease to the extent of the premises covered by the new lease or leases. As a matter of language that seems to me to be a readily available interpretation and one which I consider is called for given the express words by which a qualifying tenant is defined.

Further, for reasons which I have already indicated, it does not appear to me that there is any gap in the legal situation which results from such an interpretation. Plainly the money which will pass by way of rent under the existing lease will be reduced, but that is well catered for by existing common law principles.

Finally, I should mention that counsel for the claimants painted a picture in which a lessee in the position of the defendants would, following pure self interest, be likely to sell off by assignment all the leases of all the flats, leaving the claimant to be faced during the residual term of the existing lease with a shell company as lessee of the common parts, and with no incentive to maintain them.

There was considerable debate before me about whether this was a likely or realistic scenario and how it might be addressed as a matter of law. The defendants pointed out that in the draft of the proposed lease attached to their notices claiming the grant of the new leases the claimants were given a right to payment of service charges with a concomitant obligation to maintain the property. The claimant riposted that that would not help during the residual term of the existing lease since the common parts would be vested in the defendants, on this hypothesis a shell company, and hence the claimants would have no access to the common parts in order to be able to satisfy the proposed obligation to maintain.

Counsel for the defendant in his turn replied that in that event the claimant would simply forfeit the common parts for breach of the maintenance covenant.

I do not think it is necessary for me to get into the detail of this. It appears to me that in almost all circumstances it would be likely that the parties - I am not just talking about the present parties but parties in any similar situation - would arrive at terms in the new lease which would cater for these matters with the fallback position mentioned by counsel for the defendants that, if the shell company failed to perform its obligations under the existing lease in respect of the retained common parts, its interests could ultimately be forfeited.

If the parties were unable to agree such terms it seems to me that the tribunal would have sufficient powers under section 91(2) of the Act to ensure that the new leases contain terms which were likely to preclude the sort of difficulties arising as suggested by counsel for the claimants.

Ultimately, however, even if the claimants did run the kind of risk that their counsel suggested, the wording of the statute is, in my view, clear, and covers explicitly the situation of the defendants.

Accordingly, they are qualifying tenants who are entitled to a grant of the new leases.