Western Heritable Investment Co Ltd v Husband

Rent Acts — Correct interpretation of ‘scarcity’ provision in determination of a fair rent — Section 42(2) of Rent (Scotland) Act 1971, the wording of which is identical with that of section 70(2) of the Rent Act 1977 applying to England and Wales — Important decision of House of Lords, reversing a decision of the Scottish Court of Session — A Scottish rent assessment committee based their determination of fair rents on those fixed by a previous committee who, in assessing the rents of comparable houses, had deducted 40% from a vacant possession capital value calculation on account of ‘relatively high scarcity’ in the area — On appeal by the landlords to the Court of Session two out of the three judges held that the deduction for scarcity ought not to have been made and that the committee were wrong to have relied on the previous committee’s computations, which were vitiated by error of law in making such a deduction — House of Lords held unanimously that the Court of Session were in error and restored the rent assessment committee’s decision — Court of Session were wrong in interpreting section 42(2) as creating an irrebuttable presumption of fact as to the non-existence of scarcity, whatever the true facts might be — The true construction of the subsection was that it required fair rents to be determined on the hypothetical basis that the house-letting market in the locality is in a state of equilibrium, in respect that the number of comparable houses available for letting does not substantially exceed the number of persons seeking to become tenants — If the actual state of affairs is that the market is unbalanced, rent officers and committees must make the adjustment in the rents needed to eliminate the element attributable to scarcity. House of Lords rejected a submission that there was no evidence that a shortage of houses to let had the effect of inflating the prices paid for houses for sale. The requirement to have regard to ‘all the circumstances’ in subsection (1) does not impose on a committee the duty to take into consideration ‘a fair return on capital’ as one of ‘the circumstances’, although there may be exceptional cases where they would be justified in considering what would be a fair return — ‘I do not accept that a committee’s decision can be challenged as erroneous in law merely because the committee have failed to take into consideration a ‘fair return on capital’ but have based their decision exclusively upon comparables’, per Lord Brightman. Observations of importance by Lord Keith on the exercise of the valuer’s professional skill in dealing with scarcity and giving effect to the statutory hypothesis — Danger of looking for rules of law in the normal exercise of the valuer’s skill — Tenant’s appeal allowed This was an appeal to the House of Lords by Janet Boyd Husband, tenant of an unfurnished house at 49 Burnfoot Drive, Glasgow, from a decision of an extra division of the Inner House of the Court of Session in favour of the landlords, Western Heritable Investment Co Ltd. The Court of Session allowed an appeal by the landlords from a decision of a rent assessment committee. Brian Gill QC and J J Mitchell, both of the Scottish Bar (instructed by Denton Hall & Burgin, agents for Balfour & Manson, of Edinburgh, for Bird, Semple & Crawford Herron, of Glasgow) appeared on behalf of the appellant; Peter Vandore QC and D I Mackay, both of the Scottish Bar (instructed by Nabarro Nathanson, agents for Gray, Muirhead & Carmichael, of Edinburgh, for Breeze, Paterson & Chapman, of Glasgow) represented the respondents. In his speech, LORD FRASER OF TULLYBELTON said: I have had the advantage of reading in advance the speeches prepared by my noble and learned friends, Lord Keith of Kinkel and Lord Brightman, and I entirely agree with them. I add a few comments of my own only because we are differing from the majority of the court below. The rent assessment committee in the present case determined the fair rent of the house occupied by the appellant by relying on the comparative method, using for comparison the rents determined for 80 similar houses on July 28 1980 by another committee, the chairman of which was a Mr Kennedy. The Kennedy committee made their determination by first finding the capital values of the houses with vacant possession. They then applied to the capital value a rate of 6% to represent a reasonable return to the landlord. From the resulting figure they made deductions for repairs and other expenses, and also a deduction of 40% because the houses were in an area of relatively high scarcity. The question at issue in the present appeal is whether that deduction of 40% for scarcity was one that the Kennedy committee were entitled to make in accordance with section 42 of the Rent (Scotland) Act 1971 (‘the 1971 Act’) or not. The majority of the Extra Division of the Court of Session (Lord Avonside and Lord Kincraig, with Lord Dunpark dissenting) held that the scarcity deduction ought not to have been made, and that the Kennedy committee’s computation of fair rents was vitiated by their error in making the deduction, and ought not to have been relied upon by the committee in the present case. Section 42 of the 1971 Act is quoted by Lord Keith of Kinkel and I need not repeat it. Lord Avonside expressed the view that to make a deduction for scarcity in a calculation such as that made by the Kennedy committee was ‘plainly wrong and ignores the provision of section 42(2) of the Act’. The final words of his opinion were that the case should be sent back to the committee to proceed as accords ‘under direction that their use of a ‘scarcity’ element in their determination is wrong in law’ (emphasis added). His lordship thus reached his decision on the basis that the issue was one of law, not depending on evidence. Lord Kincraig reached the same conclusion as Lord Avonside, partly on the same ground. Thus, Lord Kincraig said that the assessment101 committee, by making a deduction because of the scarcity of houses to let, had ‘made an assumption which is not warranted by section 42(2) of the Act. Indeed, the subsection requires them to make the very opposite assumption, that there is no scarcity of houses to let’. Lord Kincraig relied also on a second ground, which was that, in his view, there was no evidence that the capital value of houses was influenced by any scarcity of houses to let. I shall return to that point in a moment. With regard to the issue of law, on which both Lord Avonside and Lord Kincraig relied, they seem to have read the proviso in section 42(2) that ‘it shall be assumed that the number of persons seeking to become tenants . . . is not substantially greater than the number of . . . dwelling-houses’ as creating an irrebuttable presumption of fact that there is no scarcity, whatever the true facts may be. With the utmost respect, that impresses me as a most improbable construction of the subsection, especially considering that the main reason why the 1971 Act, and the various Acts thereby consolidated, were passed was the notorious shortage of accommodation to let, particularly by private landlords. If the effect of subsection 42(2) was to create such an irrebuttable presumption, I do not understand why the fair rent should be different from the market rent, or why the system of registration of rents, introduced by the Rent Act 1965 and now contained in Part IV of the 1971 Act, was necessary at all. In my opinion, the effect of subsection 42(2) is to direct that the fair rent is to be determined upon the assumption that there is no scarcity of accommodation to let. Accordingly, if there is such scarcity in fact, some allowance or deduction may have to be made for it when actual rents (or the return on actual capital values) are used for determining fair rents. Whether any allowance or deduction should be made, and, if so, how much it should be, are questions of fact to be determined upon the evidence, mainly of experts in valuation. Lord Kincraig, in the second ground of his opinion, accepted that proposition but he held that in none of the appeals before the court was there ‘any evidence’ that the capital value of the houses taken for the purposes of comparison had been influenced ‘at all’ by any shortage of houses to let within the area. I infer from that that if he had been satisfied on the evidence that the capital value of the houses was influenced by the shortage of houses to let, he would have thought it right to make some allowance for the effect of such influence. That appears to me to be the correct approach although I am, with respect, unable to agree that there is no evidence to show that the capital value was affected by the shortage of houses let. On that matter I am in full agreement with the views expressed by Lord Keith of Kinkel. I agree also with the opinion of Lord Dunpark. I would allow the appeal and restore the finding of the committee. Agreeing that the appeal should be allowed, LORD KEITH OF KINKEL said: This appeal arises out of a determination by a rent assessment committee sitting in Glasgow, dealing with a reference by a rent officer at the instance of the landlords relating to the fair rents for certain dwelling-houses subject to regulated tenancies under the Rent (Scotland) Act 1971. The issue in the appeal is concerned with the provisions of section 42(1) and (2) of the 1971 Act, which at the material time were in these terms: 42(1). In determining for the purposes of this Part of this Act what rent is or would be a fair rent under a regulated tenancy of a dwelling-house, regard shall be had, subject to the following provisions of this section, to all the circumstances (other than personal circumstances) and in particular to the age, character and locality of the dwelling-house and to its state of repair. (2). For the purposes of the determination it shall be assumed that the number of persons seeking to become tenants of similar dwelling-houses in the locality on the terms (other than those relating to rent) of the regulated tenancy is not substantially greater than the number of such dwelling-houses in the locality which are available for letting on such terms. Before the committee the landlords put forward, through the evidence of a surveyor, certain figures of fair rent based upon the decision of another committee made as at mid-1976, adjusted to take into account an allowance for insurance and management and also for the increase in the cost of repairs and the effect of inflation since that time. This brought out a rent of £855 for a four-apartment house and one of £950 for a five-apartment house. In support of these figures the surveyor submitted a calculation based on a fair return on capital value. He estimated the capital value of a typical house at £15,200, and a fair return at 6%, bringing out £593. From this he deducted 35% for scarcity, while maintaining that no such deduction ought properly to be made, and added to the resultant figure certain sums for repairs, insurance and management, making a total of £905 for a four-apartment house. The committee did not accept the surveyor’s computation based on the mid-1976 registered rents, nor his estimate of £15,200 for capital value. They took the view that there was insufficient evidence to enable them to proceed on the basis of present-day market rents, and preferred to rely upon the fair rents fixed for 80 comparable houses by the determination of another committee (the Kennedy committee) given about three months previously. In the result, they fixed the fair rent for a four-apartment house at £725 and for a five-apartment at £750, which represented a modest increase on those fixed by the rent officer. Before the Kennedy committee, the landlords’ witness had put forward a computation of fair rent based on a vacant possession capital value for a four-apartment house of £15,500, reduced by 33 1/3% in respect of ‘scarcity’, a fair return of 7%, and additions in respect of repairs, insurance and management, bringing out a final figure of £946. The committee took the view that the vacant possession capital value was properly to be estimated at £14,000, that a figure of 6% was appropriate for a fair return, and that 40% should be deducted as being what they regarded as appropriate for an area of ‘relatively high scarcity’. They accepted the landlords’ figures for repairs etc, and in the result brought out a figure of £727. The landlords appealed to the Court of Session under section 13 of the Tribunals and Inquiries Act 1958, their principal contention being that the committee had erred in law by failing to form any conclusion on the propriety of making a deduction in respect of ‘scarcity’ from vacant possession capital value, and in relying on the decision of the Kennedy committee, which was arrived at by making a deduction of that character. The appeal came before an Extra Division of the Inner House which by a majority (Lords Avonside and Kincraig, Lord Dunpark dissenting) allowed the appeal and remitted back to the committee to reassess the fair rents in the light of their opinions. The first matter for consideration is the true intendment of section 42(2) of the 1971 Act. In my opinion it is clear that on a proper construction the subsection requires fair rents to be determined on the hypothetical basis that the house-letting market in the locality is in a state of equilibrium, in respect that the number of comparable houses available for letting does not substantially exceed the number of persons seeking to become tenants. If the actual state of affairs is that the market is unbalanced, in respect that the demand for houses to let substantially exceeds the supply, then the rents actually paid in the market will reflect the imbalance, being higher than they would be in a balanced market. In that situation it will be necessary for the rent officer and the rent assessment committee, in so far as in striking a fair rent they rely on the rents actually being paid in the market, to apply to these rents a discounting procedure in order to eliminate from them the element which is attributable to the relative scarcity of houses available for letting. Where some method of valuation other than comparison with market rents is adopted, the exercise will be less straightforward. But it will be necessary to proceed in such a way that the resultant figure of fair rent accords with the statutory hypothesis. The purpose of the enactment is plain. It is to secure that when market rents have been pushed up by a shortage of houses to let, tenants do not have to bear the burden of the increase over what would otherwise be fair which is attributable to that shortage. In the opinions of the majority of the Extra Division there are indications of a view that what section 42(2) requires is that, whatever the actual state of the house-letting market, it must be assumed to be in balance, so that the rents actually being paid in the market represent what would be expected to be paid in such a balanced market. If that is what the majority intended to hold, it is clearly incorrect, and indeed counsel for the respondent landlords did not seek to support it. What the respondents did seek to argue was that, since there was no evidence before the committee whose determination was the subject of appeal, or before the Kennedy committee upon whose decision the former relied, tending to show that a shortage of houses to let had the effect of inflating the prices paid for houses for sale, it was erroneous to make any ‘scarcity’ deduction from vacant possession capital values in the process of determining fair rents on the basis of a fair return to the landlord. It was not disputed that both102 the present committee and the Kennedy committee had before them cogent evidence of a serious scarcity of houses to let in the relevant locality. As Lord Dunpark said in the course of his dissenting opinion, there would appear to be three main guidelines available in the calculation of a fair rent under the Act. The first is to have regard to fair market rents for similar properties. The second is to compare registered rents for other similar protected tenancy properties. The third is to ascertain what would be a fair return to the landlord on the capital value of his house. I would observe that the third method, which represents some sort of application of what is known as the contractor’s principle of valuation, seems to have gained considerable currency before Glasgow rent assessment committees. The contractor’s principle is a notoriously unreliable method of valuation, normally used only as a last resort. It is also to be observed that not only in this case, but also in the Kennedy committee’s case and others which have been drawn to our attention, the valuer appearing for the landlords did not seek to support a figure of fair rent derived from a straight application of a suitable percentage return to his estimate of vacant possession capital value. A deduction of at least 33 1/3% was invariably made. This tends to suggest that in the valuer’s professional opinion the resultant figure would be unreasonably high if such a deduction was not made. The figure which would have resulted from the valuer’s calculations in the present case would, in the absence of such a deduction, have amounted to about £1,200, as against the figure of £855 which he actually put forward as being a proper estimate of the fair rent. Whether or not a shortage of houses for letting has the effect of inflating the price paid for houses with vacant possession may not be capable of being precisely demonstrated, though it would appear not unreasonable to infer that such an effect is a likely one. Inability to find a house to let might well turn many persons seeking accommodation on to the house purchase market, and thus tend to create an upward trend in prices. However that may be, it would, in my opinion, be bad valuation practice to proceed upon a rigid rule of thumb basis of applying an assumed fair rate of return to vacant possession capital value. There are many factors which the valuer should keep in mind in order to arrive at a reasonable result. In Skilling v Arcari’s Executors 1974 SC (HL) 42, Lord Morris of Borth-y-Gest said at p 53: A purchaser might be willing to pay a high price in order to have a house for his own personal occupation. That would be a personal circumstance which would have to be disregarded. Alternatively, a purchaser might have bought with vacant possession and with the intention of letting. He would know that, whatever was the sum that he had paid, a tenant under a regulated tenancy could seek a determination as to what, having regard to all the circumstances (except personal ones), was the fair rent. On the other hand, a purchaser might have bought a house with a sitting tenant and have paid a purchase price based upon his hope or expectation of receiving some particular sum (being either the then existing rent or some other sum) by way of rent. He would, however, always have to contemplate that under a regulated tenancy an assessment as to the fair rent could be sought. This passage is of importance as illustrating the need, where the art of valuation is being exercised in the present context, to avoid rigidity of approach and have regard to all relevant circumstances. A list of prices paid for comparable houses with vacant possession may, without more, be an uncertain guide. There is no evidence either in this case or in the Kennedy committee’s case, to indicate whether the houses, the purchase prices of which were adduced in evidence, were bought for personal occupation or for investment purposes. The former may well be regarded as the more probable. The material must be handled with caution. As has been mentioned, it is apparent that many professional valuers acting for landlords have, in their application of this variant of the contractor’s principle to the exercise of determining a fair rent, consistently made a substantial deduction from their estimates of vacant possession capital values. This shows that in practice they have indeed treated the raw material with caution. These deductions have been made because the valuers concerned considered them necessary, in the exercise of their professional skill, in order to arrive at a figure of fair rent which corresponded to the statutory requirements of section 42(1) and (2) of the 1971 Act. The deductions have been described as having been made to discount the ‘scarcity’ element. It seems to me that this is no more than a compendious manner of describing the valuer’s recognition that his figure of fair rent had to take into account the statutory hypothesis postulated by section 42(2). The attempt to erect this recognition into a breach of some supposed rule of law is misconceived. We are here concerned not with any rule of law but with an exercise of the valuer’s professional skill. In all the circumstances I consider it to be clear that neither the committee in the present case nor the Kennedy committee fell into any error of law, and that both committees had evidence before them upon which they were entitled to reach the determinations they did. The committees were well qualified to assess the effect of the evidence, including among their membership, as each of them did, a chartered surveyor. I am of opinion, for the reasons I have indicated, that there are no grounds upon which a court of law could properly interfere with the determinations. I would therefore allow the appeal and sustain the determinations of the rent assessment committee. The appellants are entitled to their expenses before this House and in the Court of Session. Agreeing, LORD BRIGHTMAN said: I am in entire agreement with the views expressed by my noble and learned friends, Lord Fraser of Tullybelton and Lord Keith of Kinkel. The appeal before your lordships is concerned with an application dated August 17 1979 by the landlord for the registration of the rent of an unfurnished house, 49 Burnfoot Drive, Glasgow, which is let under a regulated tenancy to the appellant, Janet Boyd Husband. At the date of the application the rent payable was the equivalent of £420 a year. The new rent proposed by the landlord was £900. On January 14 1980, the rent officer determined a fair rent of £680 a year, following which there was a reference to the rent assessment committee at the instance of the landlord. At the hearing, which took place before the committee in September 1980, the landlords’ surveyor, Mr McNeill, submitted, in a written proof of his evidence, that ‘having in regard to all the circumstances I consider that the fair rent as at August and September 1979 can be fairly stated at £855 . . .’. In fact, the proof had originally specified £900 as in the application, but Mr McNeill deleted this and inserted £855 after, no doubt, more mature consideration. The committee did not accept the rent officer’s determination, and raised the rent of no 49 Burnfoot Drive (and other similar houses comprised in concurrent applications) to £725. In reaching that conclusion, the committee expressed themselves as determining the fair rent by reference to 80 comparables which had been the subject-matter of a decision of another rent assessment committee (the Kennedy committee) on July 28 1980, to which I shall refer as the Kennedy comparables. The landlords appealed to the Court of Session on three grounds (shortly stated): Ground (1). The committee erred by ‘failing to take into account consideration of a fair return on capital, basing their decision exclusively upon comparison with a previous determination’. Ground (2). The committee erred by ‘failing to come to any concluded view on the appellants’ argument as to the propriety of making a deduction for scarcity from capital value with vacant possession for the purposes of assessing a fair return on capital’. Ground (3). ‘That in any event the committee was not entitled to rely upon a comparison with the said previous determination . . . The said previous determinations were criticised for making a scarcity deduction’. There is, I think, implicit in grounds (1) and (2), the proposition that the requirement in subsection (1) of section 42 to have regard to ‘all the circumstances’ imposes on an assessment committee the duty to take into consideration ‘a fair return on capital’ as one of ‘the circumstances’. I disagree. I accept that there may be the exceptional case in which a committee are justified in taking into consideration what would be a ‘fair return on capital’, leaving aside the precise definition of ‘capital’ in this context. I do not accept that a committee’s decision can be challenged as erroneous in law merely because the committee have failed to take into consideration a ‘fair return on capital’ but have based their decision exclusively upon comparables. The Act is concerned with the determination of a ‘fair rent’, that is to say, a rent which is fair to the landlord and fair to the tenant, and yield on invested capital is not an essential ingredient of that determination. If comparables are available which do not reflect, or are discounted so as not to reflect, scarcity value, such comparables are the best guide to a fair rent. Ground (3) appears to be that to which argument in the Court of Session was principally directed; the argument being that the Kennedy comparables were not true comparables because they were based upon a ‘fair return on capital’ from which a deduction of103 40% was made for ‘scarcity value’. Lord Avonside, with whom Lord Kincraig concurred, expressed the opinion that (at least in the context of a ‘capital value’ approach) such a deduction ‘is plainly wrong and ignores the provision of section 42(2) of the Act . . . My understanding [of the argument of counsel] was that it was said that the Act was designed to favour tenants. That suggestion is insupportable, looking to the provisions of the Act’. Lord Avonside concluded his opinion by recommending that the five cases before the Court of Session ‘should be sent back to the committees to proceed as accords, under direction that their use of a ‘scarcity’ element in their determination is wrong in law’. One matter which seems to me to be clear beyond a peradventure is that the Act was designed to favour tenants by protecting them from any increase of rent which would otherwise have been caused by demand exceeding supply. The Act requires the rent to be determined on the hypothetical basis of an equilibrium, ie there are X dwelling-houses of the particular sort in question which landlords are desirous of letting, and there are X tenants who are desirous of renting accommodation of that sort; what in those circumstances is the ‘fair rent’ for the landlords to demand and for the tenants to pay?  In an area of scarcity that hypothesis inevitably favours tenants and disadvantages landlords, as section 42 of the 1971 Act intended, as also did its predecessor section 27 of the Rent Act 1965. If scarcity of accommodation causes the sale value of dwelling-houses with vacant possession to be inflated, it seems to me that the use of that inflated value as a touchstone for a ‘fair rent’ which has to be determined as if no scarcity of accommodation existed, would deprive section 42(2) of its obvious purpose. I find myself in complete agreement with the reasoning of Lord Dunpark. In so far as Lord Kincraig rested his opinion on the alternative ground that there was no evidence in the Kennedy case that the ‘capital value’ of the Kennedy comparables was enhanced by scarcity of accommodation and that therefore the Kennedy comparables were not true comparables, I think that there was ample such evidence. I would allow this appeal. LORDS ROSKILL and TEMPLEMAN agreed that the appeal should be allowed for the reasons given in the speeches of Lords Fraser of Tullybelton, Keith of Kinkel and Brightman, and did not add any observations of their own. The appeal was allowed with costs in the House of Lords and expenses in the Court of Session.