Landlord and Tenant Act 1987, Part I

Landlord and Tenant Act 1987, Part I Tenants’ pre-emption rights; Purchase notices, default notices and principal terms

Summary

In a case where a freeholder failed to offer qualifying tenants the right of first refusal, under the Landlord and Tenant Act 1987 prior to granting roof space leases, the High Court held that a tenants’ s19 default notice was valid. It also held that the court at first instance had not been wrong in declining to exercise its discretion not to order the transfer of the leases and that the “principal terms” of the contract may be more than simply the consideration, even if not in fact included within the original contract.

Facts

Part I of the Landlord and Tenant Act 1987 (the 1987 Act) gives qualifying tenants of flats within a building (that itself falls within the Act) the right, acting collectively, of first refusal where their immediate landlord proposes to dispose of an interest in the building. The right is not freestanding and is a right only to take the disposal the landlord is proposing to make and on the terms it proposes.

Where the immediate landlord of the qualifying tenants makes a relevant disposal in breach of the 1987 Act, not only has the landlord committed a criminal offence, but the qualifying tenants have the following rights:

• To serve a notice on the purchaser to obtain particulars of the terms of that disposal: s11A
• To serve a purchase notice requiring the purchaser to dispose of the interest in question to the qualifying tenants’ nominee purchaser on the terms “on which it was made (including those relating to the consideration payable)”: s12B

In addition, section 19 of the Act gives the court power, on application of an interested person, to make an order requiring any person who has defaulted in its obligations imposed under Part 1 of the Act, to make good the default. Before an application can be made, a ‘default notice’ must be served on the person in question requiring the default to be made good, and more than 14 days must have elapsed since service of such notice: s19(2). There is no prescribed form of ‘default notice.’

This case concerns a block of flats (within the 1987 Act), containing 19 flats let on long leases to tenants who were all qualifying tenants under the Act and who all owned a share in the freeholder, Block 6 Ashley Gardens Limited (the freeholder).

In early 2011 there was a concern about the state of the roof of the block, which led to discussions among the freeholder’s board of directors as to how to resolve this. Ultimately, on 5 July 2012, leases over part of the roof space of the block were granted to three top floor tenants (the purchasers). As the High Court acknowledged, “Each lease was “tied” to [purchaser’s current] lease of [its flat] in the sense that (i) the Lease stipulated that the roof space that was demised was to be used only by the lessee of [the flat], and/or the family in occupation of that flat, as a private roof garden; and (ii) the Lease and the corresponding lease of [the flat] had to be owned and transferred as a package so that it would be impossible for someone other than the tenant of [the flat] to own the corresponding Lease.” The consideration for each lease was £1, but the leases also required the purchasers to carry out works to the roof and the purchasers additionally agreed to contribute £100,000 towards works to the common parts.

The freeholder (the immediate landlord of the qualifying tenants) did not serve notices under section 5 of the 1987 Act offering the qualifying tenants the right of first refusal, even though the purchasers, who were also directors of the freeholder, were aware of the requirements of the Act.

In about 2015, the qualifying tenants of the block started to realise that these leases had been granted without any notice under s5 of the 1987 Act having been given, and that they might be able to acquire those leases. Accordingly, a majority of the tenants entered into a participation agreement that recorded their intention to seek to exercise their rights under the Act and set out a framework for doing so. In 2020 they served purchase notices under s12B of the Act, requiring the transfer of the leases to them, followed by default notices under s19, on 21 July 2020.

Issues

The secondary question was as to the sums payable on the transfer.

First Instance

At first instance (Block 6 Ashley Gardens Roof Gardens Limited v S Franses Limited & others [2022] CLCC, 28.4.22, unreported; Transcript – Falcon Chambers website) the court found that the purchase notices and default notices served on the purchasers were valid and ordered the transfer of the leases, although the consideration was to include both the cost of the roof works and the contribution to the common parts costs.

There had been some dispute as to whether the purchase notices were in fact valid; they required the disposal, of the subject matter of the original disposal, “on the terms on which it was made in accordance with the original disposal, including the consideration” to be made to the nominated person – echoing the wording of s12B. HHJ Dight held that a purchase notice did not need to specify the actual consideration. It was common ground by the date of the appeal that valid notices were served on the purchasers on 22 June 2020 and/or 9 July 2020.

HHJ Dight also held that the estoppel argument raised by the lease purchasers failed. Having found that the parties cannot contract out of 1987 Act rights, HHJ Dight went on to say that the tenants cannot be estopped from exercising those rights as this is “not only consistent with the policy behind the Act itself but in my view is reinforced by the fact that the policy is backed up by criminal sanctions for contravention of the tenants’ rights. It seems to me highly unlikely that, as a matter of jurisprudence, criminal sanctions could be defeated by an estoppel by convention, because it is not a matter for the parties but for the state to determine whether the criminal offence has been committed.” He also held the facts to support an estoppel claim had not been made out.

HHJ Dight ordered that the qualifying tenants were “entitled to an order that the Leases be transferred to it on the same terms as those on which they were originally disposed of.”

The purchasers appealed and the qualifying tenants cross-appealed as to the consideration and principal terms of the disposal.

Decision

Purchasers appeal

Default notices

The High Court held that the default notices were valid. There is no prescribed form of notice; all that is required is “simply for a document that does what s19(2) requires” which is to call “on the [purchasers] to comply with their obligations under section 12B” and so a solicitor’s letter may well suffice. The court agreed with the conclusion of HHJ Dight that “In this case the notice served by the letter of 21 July 2020 cannot… be said to be invalid in so far as it asks for a contract in the form of the TR1. It was really just calling on the [purchasers] to comply with their obligations … and was sufficient notice under section 19(2)(a) of the requirement to make good the default”. Combined with a threat of “legal enforcement proceedings,” the solicitors’ letter conveyed the clear message to the purchasers that the nominee purchaser was requiring the purchasers to makes good their default in complying with their duty under s12B(2).

Discretion

Section 19 of the Act provides that the court “may” make an order rather than stipulating that it “must” make an order.

At first instance HHJ Dight had made an order in the qualifying tenants’ favour, notwithstanding the 44 factors relied upon by the purchasers as to why an order ought not to be made.

An appeal against the exercise of a judge’s discretion is extremely difficult. It is not sufficient for a court to be persuaded it would have exercised its discretion differently; it is necessary, as Mostyn J said R v Competition and Markets Authority [2022] 4 WLR 2940, Ch to pay “a high degree of deference” to the Judge’s exercise of the discretion.

The High Court dismissed the purchasers’ appeal that the judge had erred in the way he directed himself as to the scope of his discretion. The High Court made it clear that HHJ Dight noted: “correctly, that s12B(2) imposes a duty on [the purchasers] to convey the Leases to [the qualifying tenants] (see the judgment of Aldous LJ in Kay Green and others v Twinsectra [1996] 1 WLR 1587 at 1597B to E). Therefore, any exercise of the discretion in favour of [the purchasers] will result in them being relieved of a duty imposed by s12B(2). The Judge’s point is simply that, against that background, the discretion afforded by s19 involves more than a high-level analysis of whether it would be “fair” for [the purchasers] to be obliged to transfer the Leases. It also involves an analysis of whether they should be relieved from a duty that Parliament has imposed on them.” The decision of Michaels v Harley House (Marylebone) Ltd [ [1998] EWCA Civ 1714 did not set out any legal principles of general application with respect to the exercise of discretion.

Tenants’ cross appeal

The tenants cross-appeal as to the sums to be paid for the transfer of the leases failed. In essence:

• The tenants’ argued that the agreement made by the purchasers as to the contribution to the costs of the common parts fell withins2 of the Law of Property (Miscellaneous Provisions) Act 1989 and because the agreement was not set out in writing, it was not a contractually binding obligation. The court disagreed; the 1989 Act does not apply in these circumstances; a purposive construction of the 1987 Act is required, and such a construction did not require “terms”, referred to in s12B(2), only to be “enforceable terms”. Woodridge v Downie (1998) 76 P&CR 239, LT not followed;
• The tenants also argued that the covenant to carry out the roof works (and so the recoverability of the cost of such works) was not “consideration” (York House (Chelsea Ltd v Thompson [2020] Ch 1). The purchasers conceded this, but the court held that it was still a “term” on which the purchasers obtained the leases and thus was a matter to be taken into account for the purposes of s12B(2).

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