Investment & Freehold English Estates Ltd v Casement

Rent Act 1977 — Long tenancy — Exclusion from Rent Act protection of tenancies where rent payable is less than two-thirds of rateable value of dwelling-house on the appropriate day — Meaning of ‘rent’ — Provision in section 80(1) of the Housing Act 1969 (now in section 5(4) of the 1977 Act) that in determining whether a long tenancy is a tenancy at a low rent sums payable (inter alia) in respect of services are to be disregarded — The purpose of this provision is to prevent a long tenancy from being brought within the Rent Act by an increase in the service charge (which would restrict the charging of a premium on assignment) — In the present case the long tenancy was granted in 1972 (ie after the above relaxation by section 80(1) of the 1969 Act had come into force) so that any increase in the service charge which would bring the total rent up to or beyond two-thirds of the rateable value would fall to be disregarded — The lease, however, contained certain provisions which created difficulty and confusion to which the defendant drew attention — The first was a proviso designed to ensure that the fixed rent together with the variable portion which included the service charge should never exceed two-thirds of the rateable value — The second was an agreement that if in the future the law ‘shall have been amended’, so that the service charge did not have the effect of bringing the rent above two-thirds of the rateable value, the above proviso would have no effect and the landlord would be at liberty to demand a full contribution towards his expenditure — The judge, who found the construction not at all easy, held that these provisions had no operative effect, but that the sums payable in respect of the service charge had by statute to be disregarded in relation to the two-thirds of rateable value rule, and that accordingly the plaintiff landlords were entitled to demand a full contribution towards their relevant expenditure — Declaration accordingly No cases are referred to in this report. The plaintiffs, Investment & Freehold English Estates Ltd, sought by this summons a declaration as to the true construction of a point in a lease of a flat of which they were the lessors, the defendant, A D E Casement, being the lessee. The flat in question was one of eight in a block known as 5 Kensington Park Gardens, London W11. David Neuberger (instructed by Julian Holy) appeared on behalf of the plaintiffs; N Patten (instructed by Freed Stone Goodman) represented the defendant. Giving judgment, JUDGE PAUL BAKER QC said: This is a short and difficult point of construction and I have not found it at all easy, but the submissions to me are such that I think I can deal with it straight away. It arises out of a lease of a flat which is one of eight flats in a block known as 5 Kensington Park Gardens, W11, the lease being made on May 18 1972 between Cityland Securities Ltd (defined there as ‘the lessor’) and Daniel Joseph Murphy (defined as ‘the lessee’). There then follows the description of the flat and the associated easements and so forth, which I need not deal with. But coming now to the habendum, it is: ‘To hold the demised premises unto the lessee for a term from March 25 1968 to March 15 2001.’ At that point one notices there is the date set there, March 25 1968, but of course it is well established that the term starts and the contract begins at the date when it was entered into, which was in May 1972. But the date there may have some relevance for the computation, for example, for the years in which the painting obligation arises, or for computation of rent and matters of that sort. Even though the lease was granted some four years after the date specified, there was still over 21 years of the term at the time it was granted and, therefore, it is, for the purpose of legislation (which I must notice shortly), a long tenancy. The rent is £75 a year and also a sum of £35 on account of the proportion of expenses referred to in clause 2(3). Then follow the payment provisions, which I do not think I need deal with. The first payment was to be made on June 24 1972; that is the first rent day after the grant of the lease. Then there is, by way of further and additional rent, a sum of money equal to the amount which the lessor may expend in effecting or maintaining the insurance of the premises against certain risks, and that is paid on the quarterly day for payment of rent next following the expenditure. So there are those three elements in the rent: that is to say, the basic rent of £75, which is not reviewable; then what we may call the service charge of £35 or such other sum as properly attributable to this flat; and the insurance. Now comes an important proviso for the purposes of this case and on which the issue depends: Provided always that the ground rent hereby reserved, together with a proportion of expenditure referred to in clause 2(3), will in no event exceed two-thirds of the rateable value of the premises, but provided nevertheless that, should the expenses, together with the ground rent, be likely in any one year to exceed two-thirds of the rateable value, the lessor shall not be under any obligation to carry out any work or perform any duties notwithstanding his covenant which would impose upon him a liability in excess. To the uninitiated it may seem an odd sort of proviso that one should limit the rent to two-thirds of the rateable value, but of course, as is well known to those who practise in this part of the law, rent exceeding two-thirds of the rateable value brings along with it the protection of the Rent Acts; whereas a rent of less than two-thirds of the rateable value does not. Furthermore, it is also known that there has been argument as to whether a service charge is to be reckoned to be part of the rent, and it has clearly been held that it is. It is against that background that one can readily understand the reason for the proviso, if the intention was to exclude this lease from the Rent Acts and thereby exclude it inter alia from those parts of the Rent Acts which prohibit premiums both on the grant of the lease and on its subsequent assignment by the tenant. If the matter stopped there, there would be no doubt that that would apply to prevent the recovery of a greater rent, including the service charge, than one which exceeded two-thirds of the rateable value. But the question I have to determine is the following; that upon the true construction of the proviso to clause 1 to the above-mentioned lease, and pursuant to clause 12 of the above-mentioned lease, the plaintiffs are entitled to demand a full contribution from the defendant in relation to monies expended by the plaintiffs in performing its covenants contained in113 the above-mentioned lease in accordance with the provisions of clause 2(3) of the lease. The question refers also to clause 12 of the lease, on which really the argument hinges. It is: That the Lessor and the Lessee hereby agree and covenant that accordingly if the Leasehold Reform Act 1967 shall have been amended at any time in the future by legislative action or by a decision of the High Court to the effect that service charges do not for the purposes of the Rent Acts (as amended by the Leasehold Reform Act 1967) attract the operation of the Acts to estop the Lessor or the Lessee wishing to assign the residue of the term from charging a premium on the grant of the lease or assignment, as the case may be, then in such event the proviso hereinbefore contained shall be of no effect and the Lessor shall be at liberty to demand a full contribution from the Lessee as provided in clause 2(3) of these presents, notwithstanding that such contribution together with the ground rent hereby reserved exceeds two-thirds of the rateable value. I must put that on one side for the moment and say a word about the legislation to which there is express reference in that clause. I have very helpfully been taken on a tour of it, starting in 1920, but I do not think I need rehearse all that for the purposes of this judgment. I think the important part is that by the Leasehold Reform Act 1967, section 39, all leases, irrespective of length — including long leases — were brought under Rent Act protection. It was done by a referential means of amending the Rent Act 1957, but the effect of it, by adding long tenancies to a list in the Rent Act 1965, was to bring leases, as I say, irrespective of length, into the Rent Acts. That had this effect: in calculating whether the rent was less than two-thirds the rateable value, one took into account as part of the rent the service charges. The rent being at two-thirds of the rateable value had always had the effect of excluding the Rent Acts, whatever the length of the lease. Following that, a lease of whatever length, if the rent was more than two-thirds of the rateable value, could not be granted or assigned for a premium and, as I say, service charges were to be calculated as part of the rent. That very stringent provision, which indeed applied the Rent Acts to virtually every flat except possibly the most luxurious, which were taken out by their rateable value at the top end, has been successively modified. The important modification for the purposes of this case is that in 1969, by the Housing Act 1969, section 80, service charges need not be reckoned into part of the rent in calculating whether the rent exceeded two-thirds of the rateable value. If the rest of the rent did not exceed two-thirds of the rateable value, then the fact that the service charge may put it over did not make it a lease which brought down inter alia on it the premium provisions. One other matter I should notice before I leave the statutory provisions is that between 1967 and 1969 the Rent Acts were consolidated on May 8 1968 by the Rent Act 1968, which came into force exactly a month later. That consolidated the previous Rent Acts including those parts of the Leasehold Reform Act 1967 which bore on the subject, and thus section 39 went off the statute book but re-emerged at some point in the Rent Act 1968. By the time this lease was granted in 1972, the danger which had obviously been looked at and been guarded against of having the rent go over the two-thirds and thereby bring about the premium restrictions among other things had already gone by legislative action. The parties nevertheless put a clause in on the basis that such alteration and change in the law had not taken place, and until it had they would restrict the rent to within two-thirds of the rateable value. Mr Patten’s argument on this is quite simple; that when you look at the earlier proviso it is clear and unambiguous, as I have noticed, and when you come to clause 12 it was a provision that was out of date when it was put in. The Leasehold Reform Act could not be amended at any time in the future — it had already been amended in the past. Therefore, there is nothing for this clause to operate on. There is obviously some misapprehension here which may form the basis of some action for rectification or may not; but as a matter of construction it says you cannot apply it to these circumstances which have arisen because it had no operation. The Act of 1967 was not amended or judicially construed at any time after 1972 in any relevant sense, and therefore one is left with the proviso through the whole term. There is considerable force in that argument, but I have come to the conclusion that as a matter of construction I must find that that is not the true meaning of the clause when one comes to attend to the wording more closely. First of all, one sees that it says, reading the terms of it overall, that it operates at the time, in my judgment, of the grant of the lease, because what it says is: The Lessor and the Lessee hereby covenant accordingly; that if the Leasehold Reform Act shall have been amended at any time in the future . . . ‘In the future’ I would take to be simply an expression that means in the future following the passing of the Act. I would not have taken that view in the ordinary course, but the rest of the clause would seem to indicate it. Apart from the words ‘shall have been amended’, which would seem to indicate that it had already been amended at the grant of the lease — those words by themselves — one then goes on to describe what the effect of the amendment shall have been. It says: . . . to the effect that service charges do not for the purpose of the Rent Acts (as amended by the Leasehold Reform Act) attract the operation of the Acts to estop . . . or ‘prohibit’, as I would read that word, . . . the Lessor or the Lessee wishing to assign the residue of the term from charging a premium on the grant of the lease or assignment, as the case may be. It does not refer to the position of lessors and lessees generally; it refers to this particular lessor as defined. Yet the position of the lessor in this connection is only relevant at the grant of lease, not during its course. Then the clause goes on: And in such event the proviso hereinbefore contained shall be of no effect. It is not that it shall become of no effect, but it shall from all times, as I would read that, be of no effect. It is of course on the face of it a very singular way of providing for this because one would expect the parties at the time when the lease was granted to have made up their minds whether or not the provisions applied or the law was in such a state as to allow for the grant of a premium. That is obviously the sensible and efficient way to draft such a lease. There may be some excuse for it. As I have said, this is a block of eight flats and this formula was devised because there was going to be a series of grants, or there might be a series of grants, and the legislation might change during the course of the grants. It would not be known precisely when the legislation would have changed. It has this consequence; that if the lease was granted before any relevant amendment lifting the premium provisions, it would mean that that particular lease would be subject to the restrictions and continue to be so — or might be so. That is not a case I have to consider before me. I read these two provisos together. At the grant of the lease one asks oneself, to my mind, whether the Leasehold Reform Act has already been amended and, therefore, with the consequence both that the lessor can take a premium and the lessee can subsequently assign it with the benefit of a premium. As I say, I have not found that at all an easy point of construction, but doing the best I can with the language with which I am confronted and particularly relying on the words ‘shall have been’ and the references to the lessor in the clause, I am of the opinion that the provisos in clause I have no operation. Therefore I shall make the declaration that is asked for.