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Merger

No intention to merge

Equity prevails

BOH Ltd v Eastern Power Networks plc (formerly EDF)
[2011] EWCA Civ 19

Summary

Where a tenancy and the reversion expectant upon the determination of the term become vested in one person, then there is a presumption against merger in the absence of an express or presumed intention to merge. There will be no presumed intention to merge if it would be against that person’s interests. The fact that non-merger is against the interest of any third party is irrelevant.

Facts

Eastern Power Networks (formerly EDF and referred to as such throughout the Court of Appeal hearing and judgment) had a lease of three different plots of land (‘plot 2’ and two other plots) on the Wembley Trading Estate.

The lease expired by effluxion of time in 1994 but was protected by the Landlord and Tenant Act 1954 (“1954 Act”). EDF operated an electricity sub-station on ‘plot 2’ and cabling was laid from ‘plot 2’ under and across the other plots in accordance with rights reserved to the tenant under the lease.

The freeholds of those plots then passed into the hands of separate reversioners. The freehold owner of ‘plot 2’ served a s25 notice on EDF. EDF served a counter notice and then agreed terms to purchase the freehold of ‘plot 2’ from the landlord.

The owners of the other plots (“the appellants”) subsequently argued that (i) EDF had no rights over the other plots as the lease had been brought to an end by the s25 notice, which EDF had accepted, and (ii) by purchasing the freehold of the first plot, EDF had merged the lease into the freehold thus extinguishing the lease.

First instance decision

At first instance, the court held:
  • The lease continued as the s25 notice had been ineffective to bring the lease to an end, not having been served by all the reversioners (as required by s44(1A) of the 1954 Act). In such circumstances, any estoppel/waiver would require an express acceptance by the tenant that the notice is valid notwithstanding such defect; and

  • The presumption against merger had not been rebutted.
Issues

There were two questions before to Court of Appeal:
  • Did the obtaining by EDF of the reversionary interest in ‘plot 2’ have the effect of merging the two interests, so extinguishing the tenancy of ‘plot 2’?
And if not:
  • As this would mean that the appellants would be unable to bring the tenancy to an end without EDF being a party to any s25 notice, should s44(1A) of the 1954 Act be read (in accordance with s3 of the Human Rights Act 1998 and Article 1 of the First Protocol of the Convention for the Protection of Human Rights and Fundamental Freedoms) so as to enable the appellants to serve a valid s25 notice without EDF?
Decision

On the first ground, Rimer LJ, giving the main judgment, concluded that no merger had taken place. Although at common law, there is automatic merger where a tenancy and the reversion expectant upon the determination of its term are held by the same person, the rule in equity is that there will only be a merger if the party in whom the two estates vest intends a merger. Under s185 of the Law of Property Act 1925 the equitable rule now prevails.

The intention to merge can be shown expressly or it can be presumed; and the presumed intention is to be ascertained by looking at the interest of (or benefit to) the party now holding the two estates.

In this case, it would not have been in EDF’s interest to merge the two estates so there could be no presumed intention to merge; and it as had not expressed an intention to merge them, no merger had been effected.
    “..in equity it was open to A to form an intention, and declare accordingly, that there should be no such merger and extinguishment. Equity further developed the principle that in any case in which A did not expressly evince such an intention, or in which there was no other evidence of such an intention on his part, there was a presumption against any intention for a merger if such would be against his interest. In a case in which there was no express declaration or other evidence as to A's intentions, the focus of equity's inquiry was therefore exclusively on his interests: and if a merger would be against his interests, he is presumed to have intended against any merger. That is the principle that was applied in Ingle and this court in Rhodes made it clear that it regarded Ingle as having been correctly decided. The equitable principles now prevail over the principles applicable at law.” (para 40)
Clearly, here, it would not be in EDF’s interest to merge the two interests.

The court went on to dismiss the appellants’ suggestion that, in the absence of any express intention to merge, then presumed intention should be ascertained by looking not only at the interests of EDF but, in this case, at the interests of the other two co-reversioners (who would otherwise be unable to serve notice ending the tenancy under the 1954 Act without EDF’s co-operation):
    “For the court so to presume [an intention to merge by looking at 3rd parties’ interests] in such circumstances appears to me to be contrary to the principles explained in the authorities and wrong.” (para 43)
The court refused to consider the second ground of appeal, as it raised
    “... not merely a point that was not advanced before the judge; it was one in respect of which no factual case was or, so far as I am aware, could have been made. It is a point that comes before this court entirely afresh and unsupported by any factual basis. [The appellants] accepted that no section 25 notice had been served that purported to raise the issue. The court is therefore being asked to answer a question, and presumably to make some form of declaration, based on a hypothetical set of circumstances. In my judgment, this court should not do that. The point raised by this ground of appeal is potentially of some general importance. If it is ever to be considered by this court it should only be after a concrete set of facts raising it as a real issue has first been considered by a trial judge who has then made findings on the facts and on the law applicable to them.” (para 50)
The court declined to consider purported s25 notices produced to it under cover of an email after the conclusion of the hearing.

Conclusion

While it would appear clear that no attention needs to be paid to the interests of third parties in considering merger, the court did leave open the question of whether s44(1A) could be interpreted differently under the Human Rights Act 1998.

On a practical note, as we stated after the first instance hearing, the transfer of the freehold interest in Plot 2 to EDF could have dealt expressly with the matter of easements, rather than leaving the lease to govern – which would have avoided costly and time consuming litigation.

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