Whilst most cases under the Leasehold Reform, Housing and Urban Development Act 1993 are resolved with little difficulty, certain disputes over the terms of the new lease can have important implications for the parties. The decision in Gordon v Church Commissioners for England [2006] is not only a good illustration of this – it also provides useful guidance for those advising parties on their ability to seek changes to the terms of a lease. This case also resolves uncertainty, following various conflicting decisions of the Leasehold Valuation Tribunal (LVT), on the issue of whether the 1993 Act can be used to include provisions within a new lease to allow the tenant to require its landlord to take action to deal with breaches of covenant by the landlord’s other tenants.

The facts

This matter concerned the tenant’s application to the LVT to determine the terms of the new lease of his flat, in accordance with the 1993 Act. The tenant’s flat is situated in a building containing around 30 flats, which was built in the 1960s. His lease demised the property to him for a term of 97 years from December 1961. The landlords, and respondents to his LVT application, were the Church Commissioners for England (the Commissioners).

In 2004 the tenant served notice on the Commissioners under s48 of the 1993 Act, requesting a new lease. The Commissioners served counter-notice, admitting the tenant’s right to a new lease but rejecting his proposed terms for the tenancy and making counterproposals in this regard. The parties commenced negotiations thereafter and most terms of the new lease (including the purchase price) were agreed reasonably quickly. However, the tenant sought to include a landlord’s covenant within the new lease that would enable him to require the landlord to enforce the tenant covenants in other leases within the building (the enforcement clause), subject to the landlord being given an appropriate costs indemnity. (There were also some other, minor issues between the parties that are irrelevant for the purposes of this article.)

The issue

Section 57 of the 1993 Act sets out the terms on which a new lease under that Act should be granted. Section 57(6) of the Act states:

Subsections (1) to (5) shall have effect subject to any agreement between the landlord and tenant as to the terms of the new lease or any agreement collateral thereto; and either of them may require that for the purposes of the new lease any terms of the existing lease shall be excluded or modified in so far as:

(a) it is necessary to do so in order to remedy a defect in the existing lease; or

(b) it would be unreasonable in the circumstances to include, or include without modification, the term in question in view of changes occurring since the date of commencement of the existing lease which affect the suitability on the relevant date of the provisions of that lease.

(Emphasis added.)

In contrast with the enforcement clause sought by the tenant, clause 4 of the existing lease expressly stated that the tenant was not entitled to:

...require that any such covenants or provisions as are contained herein shall be imposed upon or enforced in respect of any adjoining or neighbouring premises...

As a result, the existing lease did not enable the tenant to force his landlord to take action for any breaches of covenant by other tenants within his building or give him any right to do so. The tenant therefore had to rely on his common law remedies to deal with any problems arising from other tenants’ use of their properties.

The submissions

A key issue between the parties was whether the reference to ‘excluded or modified’ in s57(6) was wide enough to allow new provisions, not in the existing lease, to be inserted into a new lease. The Commissioners submitted that s57(6) conferred a narrower jurisdiction than this and drew the Tribunal’s attention to the footnotes in Hague on Leasehold Enfranchisement (4th edition at paragraph 32-04), which express the view that wholly new terms cannot be incorporated into a new lease under s57(6).

Relying on elements of the LVT decision in Cadogan v Stylianou [2004], the tenant disagreed with this submission. However, in the alternative, the tenant argued that his proposed enforcement clause could be described as a modification to the terms of the existing lease, in particular the exclusion of clause 4. The Commissioners contended that the introduction of the enforcement clause went beyond merely excluding or modifying clause 4, because an entirely new covenant would be introduced and any ‘modification’ to clause 4 constituted a complete reversal of its effect.

As outlined above, s57(6) offers two grounds on which to justify a proposed exclusion or modification of an existing lease term. The tenant asserted that the inclusion of the enforcement clause within the new lease could be justified on both grounds (a) and (b); something which was disputed by the Commissioners.

Section 57(6)(a)

Ground (a) refers to remedying a ‘defect’ in the existing lease. The Commissioners insisted that a defect required there to be something wrong with the lease that caused it not to work, rather than something that worked but was not as desirable as might be wished for by one party. The tenant submitted that ground (a) was not limited to patent defects where something had clearly gone wrong with the lease. The parties also disagreed as to the relevance of the lack of any impact on the purchase price for the new lease as a result of the presence or absence of the enforcement clause.

Section 57(6)(b)

Ground (b) refers to changes affecting the suitability of existing lease provisions. The tenant claimed that ‘changes’ could include changes in conveyancing practice, noting that this was accepted by Hague. He argued that such changes had affected the suitability of the relevant provisions of his lease, and gave examples to suggest the desirability of including appropriate enforcement provisions within new leases. The Commissioners sought to argue that there had to be a substantial reason for any change in conveyancing practice, so as to make it unreasonable for the existing lease provisions to be retained. In their view, there was insufficient evidence to show any change in conveyancing practice during the past 40 years so as to make it unreasonable for the tenant’s new lease not to contain the enforcement clause.

The LVT decision

Following the hearing before the LVT, the panel decided the issue of the enforcement clause in favour of the Commissioners. It noted that, despite the express provision in clause 4 of the existing lease to prevent the tenant from enforcing covenants in other leases, there was no evidence to suggest that this was hindering the sale of the properties concerned. Indeed, the LVT felt that there was a ‘ready market’ for long leases of properties in the area and in their existing form. The LVT therefore decided that there was no defect that would engage s57(6)(a).

The tribunal also found that, whilst conveyancing practice as to desirable provisions within leases had moved on, these changes were insufficient to justify the enforcement clause under s57(6)(b). However, the panel recognised the importance of the issue of including enforcement provisions within new leases, both to landlords and to tenants. It also noted that there had been conflicting decisions by the LVT on the point. It therefore felt that it was appropriate for the tenant to be given permission to appeal to the Lands Tribunal and ‘for the Lands Tribunal to resolve the point’.

The Lands Tribunal decision

HHJ Huskinson in the Lands Tribunal upheld the LVT’s decision not to include the enforcement clause within the new lease. The judge pointed out that the starting point for a new lease under the 1993 Act is the existing lease. In examining the wording of s57(6), the judge concluded that this was only intended to allow the exclusion or modification of a term in the existing lease, and that there is no jurisdiction under s57(6) to introduce a clause into the new lease that is not present in the existing lease.

The judge then assessed whether the enforcement clause could be described as an ‘exclusion or modification’ of the existing lease, rather than something new. He noted that the existing lease did not contain the enforcement clause and that, whilst the issue of enforcement was touched on in clause 4 of the existing lease, the provisions of this clause were entirely contrary to the enforcement clause sought by the tenant. The judge therefore felt that the enforcement clause could not be described as a modification of clause 4 and concluded that the substance of the tenant’s case aimed to introduce a new provision into the new lease.

As a result of his finding that the enforcement clause did not constitute an exclusion or modification as provided for in s57(6), the judge accepted that the LVT and Lands Tribunal did not have jurisdiction to order the inclusion of the enforcement clause in the tenant’s new lease. However, the judge went on to express his views as to whether grounds (a) and (b) under s57(6) would otherwise have justified the inclusion of the enforcement clause.

The judge said that he would have been prepared to use a fairly broad meaning of ‘defect’ for the purposes of s57(6)(a), but emphasised that the test was an objective one. He felt that a lease could only be described as containing ‘a defect (in the sense of shortcoming, fault, flaw or, perhaps even, imperfection)’ if the problem could reasonably be said to be a defect from the view of both the reasonable landlord and the reasonable tenant.

Whilst the judge appreciated that the enforcement clause would benefit tenants, he recognised that it might cause estate management problems and that landlords might therefore reasonably view the clause as undesirable. The judge also noted from the evidence that a lease without the enforcement clause and containing clause 4 would be acceptable security to a mortgagee in light of the terms of the lease, and that the absence of the enforcement clause would not have any significant effect on the value of the lease. The judge therefore decided that the tenant’s lease did not contain a defect.

Turning to s57(6)(b), the judge felt that changes to conveyancing practice could, in principle, constitute changes falling within this sub-paragraph. The judge noted that the inclusion of provisions similar to the enforcement clause in long residential leases is not uncommon. However, he did not feel that such provisions could be described as ‘standard conveyancing’, and therefore did not regard the omission of the enforcement clause as a departure from standard conveyancing practice. The judge concluded that any changes in conveyancing practice were insufficient to affect the suitability of the terms of the tenant’s existing lease, including clause 4. The inclusion of the enforcement clause, therefore, could not be justified on the basis of ground (b).

Comment

In its decision in this case, the LVT noted that the tenant’s proposed enforcement clause might ‘spawn considerable litigation and disagreement in a large development, into which the Landlord would inevitably be drawn’ and many landlords will therefore hope to use this case to avoid the inclusion of such clauses into new leases granted under the 1993 Act. The decision of the Lands Tribunal is also likely to be welcomed by many landlords as an appropriate clarification of the limits on tribunals’ jurisdiction under s57(6) of the 1993 Act.