First-tier Tribunal Sets Overriding Lease Prices Based on Underletting Covenants

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Case Reference : LON/00BK/OCE/2018/0179

Property : 45 – 47 [ADDRESS] [POSTCODE]

Applicant: [redacted] : [NAME] [COUNSEL] [NAME] and [NAME] [COUNSEL], Counsel both instructed by [RESPONDENT]

Respondent: [redacted]

(2) [COMPANY]

(3) [RESPONDENT]

(4) [COMPANY] : For Respondents (2), (3) and (4) [NAME] [COUNSEL] [NAME] and [NAME] [COUNSEL], Counsel instructed by [COUNSEL] of [NAME] : [NAME] under section 24 of the Leasehold Reform, Housing and Urban Development Act 1993

Tribunal Members : Tribunal Judge Dutton

Mrs E Flint [NAME] [NAME] and venue of : 10 [ADDRESS] [POSTCODE] on 21st Hearing

January 2019

Date of Decision : 7th February 2019

_______________________________________________

DECISION ____________________________________

© CROWN COPYRIGHT 2018

FIRST - TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)

2 DECISION

1. The Tribunal determines that the price payable in respect of the overriding lease 2 for Flat 3 (as defined below) is £3,035,000. 2. The Tribunal determines that the price payable in respect of the overriding lease 2 for Flat 4 (as defined below) is £1,085,000. 3. The Tribunal determines that the price payable in respect of the overriding lease 2 for Flat 5 (as defined below) is £1,025,000.

BACKGROUND

1. On 12th February 2018 notice was served under section 13 of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) on [RESPONDENT] (FH4547SS) [RESPONDENT] by the [NAME] set out in schedule 1 to that notice. The premises for which the freehold was proposed to be acquired is 45 – 47 [ADDRESS] [POSTCODE] (the Property).

2. The section 13 notice proposed that there should be an acquisition of a number of leasehold interests in the Property but for the purposes of this hearing we are requested only to deal with the overriding leases dated 31st January 2005 and 7th April 2011 as are set out on the schedule attached to this decision. With thanks to the parties we were told at the commencement of the hearing that all valuation issues had been agreed. The only issue that we needed to determine was the effect of a covenant concerning underletting contained in the Licence to Underlet (the Licence) dated 7th April 2011 between [COMPANY] ([COMPANY]) and in the case of the 3rd and part 4th floor flat between [COMPANY] (2) and [COMPANY] (3). We were told that the Licence had been granted in the same terms in respect of the three overriding leases, the details of which are set out in the schedule annexed to this decision. The issue we needed to determine was the interpretation of clause 3.3 under the heading 'Under Tenants Covenants' which says as follows:

“3.3 Not to assign charge underlet or part with or share possession or occupation of the whole or any part of the premises.”

The parties had very helpfully agreed the impact that the imposition that such clause would have on the value of the overriding leases dated 7th April 2011 which we shall call [NAME]. In respect of Flat 3, if it is found that the alienation covenant is qualified, that is to say that consent could be obtained from the party holding the benefit of the covenant, the price to be paid is £4,295,200. In respect of Flat 4 on the same assumption, the price to be paid is £1,539,000 and finally in respect of Flat 5, the price to be paid is £1,447,300.

3. However, if we find that the alienation covenant in the Licence is absolute, that is to say that the holder of the [NAME] is unable to subsequently assign or part with possession etc, then the value in respect of Flat 3 reduces to £3,035,000, for Flat 4 to £1,085,000 and to Flat 5 £1,025,000.

4. Accordingly, there is a difference in total value that might be required to be paid by [NAME] [APPELLANT] to the [NAME] of some £2,136,500 depending upon which route we take.

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5. It is we think helpful to provide something of the background as to how the matter got to this position.

6. At the time the matter came before us on 21st January 2019 the title to the Property was as follows: the freehold was held by [RESPONDENT[COMPANY]. A lease to [COMPANY] was now held by [NAME] [APPELLANT] and expires on 24th March 2184. From that lease overriding leases called for the purposes of this case [NAME]'s, and as set out on the schedule annexed hereto, were granted to [COMPANY]([NAME]), [APPELLANT] ([NAME]) and [COMPANY] ([NAME]). [NAME] [APPELLANT] also had an overriding lease granted to him but is not relevant for the purposes of considering this matter.

Accordingly, when [NAME] [APPELLANT] first served a notice seeking collective enfranchisement on 22nd December 2010, the initial notice indicated an intention by [NAME] [APPELLANT] as the nominee [NAME] for the [NAME] tenants to acquire the freehold of the Property with rights over adjacent property, a management lease, two intermediate [NAME] leases, including what was termed the enforcer lease, and for the purposes of these proceedings the overriding leases granted to [NAME], [NAME] and [NAME] on the 31st January 2005.

7. Unfortunately, for reasons that can presumably only be put down to an error, registration of this initial notice was not made at the Land Registry and accordingly section 19 of the Act did not come into play. To exploit this error the companies [NAME], [NAME] and [NAME] entered into in effect cross overriding leases so that [NAME] took from [NAME], [NAME] took from [NAME] and [NAME] took from [NAME] these leases being known as [NAME] in this scenario and all dated 7th April 2011 expiring on 15th September 2122. The [NAME] were essentially on the same terms as the [NAME] and with remarkable alacrity registered at HM Land Registry on 8th April 2011.

8. This resulted in proceedings by [NAME] [APPELLANT] attempting to amend the original section 13 notice so that he could acquire the [NAME]. He was unsuccessful in that attempt and the reasoning is set out in a Court of Appeal judgement in case [2014]EWCA Civ 1078. Mrs Justice Gloster gave the lead judgment and sets out in considerable detail the history of the ownership, which we have paraphrased above. The upshot of this, however, was that [NAME] [APPELLANT] did not proceed with the initial notice under section 13 as that would have resulted in him paying more than the true value for the overriding lease. A witness statement from [NAME] [NAME] was included with the papers and expanded upon the history and the reasoning behind the steps to create the [NAME].

9. Matters become further complicated because on 20th February 2015 [NAME] and Mrs [NAME] who own the occupational leases for the three flats, served notices under section 42 of the Act seeking extensions. The existing occupational leases expire on 19th September 2023 and the section 42 notice, if proceeded with would result in these lease terms being extended to 19th September 2113. The reasoning for this is set out in a report by [NAME] [NAME] prepared for the purposes of assessing the value of the section 42 notice, in which he says as follows at Background 1.3 “ Although you possess long leases of the flats already through companies you ultimately control, those leases are presently intermediate leases and therefore vulnerable to being compulsorily acquired by [NAME] [APPELLANT]. By serving a notice of claim for each flat (the claim/the notices) you will ensure that, even if he does

4 acquire the intermediate leases, you will still possess an interest of nearly 100 years which he will not be able to acquire. At the same time, it is proposed that [NAME] assigns his interest in Flat 5 to Dr and Mrs [NAME]. The effect of this will be to reduce the number of [NAME] flats in the Property to below the minimum required assuming this tactic is successful it will relegate the claims to a secondary line of defence.” As can be seen there has been a good deal of tactical manoeuvring by individuals and through companies to get to the position where we find ourselves at the time of this hearing. Further tactical manoeuvring enabled [NAME] [APPELLANT] to serve a further section 13 notice in February of this year when he granted an intermediate lease to his sister of the 3rd floor property giving him the necessary control to serve this further notice.

10. Prior to the hearing we received a substantial amount of papers, the most of which were of irrelevance at the time the matter came before us as so much had been agreed between the parties. What, however, was important to note was the terms of the original overriding leases by [COMPANY] to either [NAME], [NAME] or [NAME] dated 31st January 2005. Of particular importance in this case are the provisions contained at paragraph 12 onwards of the Third schedule. It is helpful if we set those out.

11. Paragraph 12 says as follows: “A tenant will not charge any part (as opposed to the whole) or the premises and will not assign underlet hold on trust for another or otherwise part with or share possession or occupation of or suffer any other person to occupy the whole or any part of the premises SAVE for a transaction complying with paragraphs 13 to 16 or in relation to an under lease subsisting at the date hereof provided that if the tenant is a body corporate occupation of the premises by its directors or shareholders or (if the shareholders are trustees) beneficiaries under the trust on which its shares are held and their respective families shall not be (a breach (sic)) of this paragraph SUBJECT TO:

12.1 The tenant notifying the landlord of the occupiers from time to time if the premises occupied under this proviso and 12.2 Such occupation being as licensee without any legal equitable or other interest in the premises being hereby created. 13 (subject to paragraphs 14-16) The tenant will not without the approval of the landlord (such approval not to be unreasonably withheld) assign or underlet the whole of the premises PROVIDED THAT with such approval (not to be unreasonably withheld). The tenant may assign or underlet a whole floor of the premises either on the terms of paragraph 16 or for the term hereby created less a nominal reversion for a peppercorn ground rent (other than service charge). 14 The tenant will procure that upon the first assignment of this lease the existing lease and this lease are vested in the same person and thereafter during the term of the existing lease that both it and this lease are both vested in the same person. 15 On any assignment of the premises to a person who is not [NAME] in the United Kingdom and in any other case if reasonably requested by the landlord, the tenant will procure; 15.1 A [NAME] in the United Kingdom approved by the landlord (such approval not to be unreasonably withheld) gives a guarantee to the landlord or 15.2 [NAME] (as security for its performance of the tenant’s obligations in this lease and on such terms as the landlord reasonably requires) deposits

5 with the landlord a sum equal to three times the aggregate of the sums payable under paragraph 11 and the service charge in the year before the assignment.

16. The tenant will not grant any underlease of the premises. 16.1 For a term less than six months or exceeding 20 years. 16.2 On terms less onerous than those in this lease, nor 16.3 Unless its terms absolutely prohibit absolutely any further assignment underletting charging or parting with or sharing possession or occupation of the whole or any part of the premises.

12. It is accepted we understand that the provisions of the 2005 [NAME] and 2011 [NAME] are the same in this regard.

13. We also received skeleton arguments from [NAME] [COUNSEL] [NAME] and unfortunately not until the morning of the hearing from [NAME] [COUNSEL] [NAME], although through no fault of his. We had the opportunity of reading both, which were of assistance to us and we are grateful to Counsel for their assistance.

14. We should also mention that the proceedings were recorded by way of stenographer and we received on the day after the hearing a transcript of the submissions made to us by both Counsel, which has also been of assistance. We hope that both sides will forgive us if we do not recount in great detail the matters set out in the parties’ respective skeleton arguments and as are set out in the transcription of the submissions made to us.

15. On behalf of the Applicant [NAME], whose skeleton was prepared before so much of the valuation issues were agreed, gave detailed views as to his interpretation of the Licence covenant which are set out at pages 13 onwards of his skeleton. Reference is made to a number of cases but in particular Arnold v Britton [2015]UKSC36 as well as [NAME] v [ADDRESS] [2001]UKPC8, [COMPANY] v Persimmon Homes [2009]UKHL38 and [NAME] v [COMPANY] [2017]UKPC2. In addition to these cases, [NAME] [APPELLANT] took us to the provisions of the Landlord and Tenant Act 1927 (section 19(1) and the Landlord and Tenant Act 1988. His submission in regard to the legislation was that the statutory provisions did not apply to a covenant given by a prospective sub-tenant to a landlord in a licence. Further where the licence covenant was an absolute covenant and not a covenant against alienation without consent of the landlord, the legislation does not apply. His submission was that the effect of the Licence means that the hypothetical [NAME] of [NAME] will not be able to assign, underlet or part with possession or occupation of whole or any part of the flat unless he is able to secure a release of the covenant from the owner of the [COMPANY] lease.

16. This obviously has an impact on the price that a [NAME] would pay for the [NAME] and that impact has been agreed by the parties depending upon the route that we take.

17. [NAME] [RESPONDENT] went on to address what he understood to be the Respondent’s arguments either that clause 3.3 of the licence covenant was in error, that there was a mistake and that it should be interpreted as though it included the wordings not without the landlord’s consent (not to be unreasonably withheld) or in the alternative that there was an implied term to the effect that the tenant may assign

6 charge underlet etc if the landlord’s consent is first obtained and such consent should not be unreasonably withheld.

18. [NAME] [NAME] then went on to consider the law in respect of the correction of mistakes and here relied on the judgment of Lord [NAME] in the Arnold v Britton case and by reference to comments made by Brightman LJ in the case of East v Pantiles [1982]2EGLR111 all of which dealt with the basis upon which a court could correct a mistake by interpretation for which the [NAME] case was cited as assistance. His submission to us was that in order to correct an instrument by construction two conditions must be satisfied. The first was that there must be a clear mistake on the face of the instrument and secondly it is clear what correction ought to be made to cure the mistake. He submitted to us that if there was more than one plausible alternative correction the mistake can only be put right by rectification, which is not within our jurisdiction and not by construction. His submission was there was no obvious mistake in clause 3.3 of the Licence as this was also consistent with the [NAME]’s published residential policy letting in October 2008. It was said that this was relevant at the time of the granting of the [NAME] in 2011.

19. The policy is as follows: “The majority of residential leases contained a clause regarding subletting of residential property. Subletting is the occupation of the premises by someone other than the [NAME]. This occupation is usually on a contractual lease or on an assured shorthold tenancy. The majority of the more modern leases state that you may sublet the flat for a term of not less than one year and not more than 20 years. The subletting must be at a full market rental value and the terms must be no less onerous than those of the lease. There is to be no further assignment or subletting and the subletting must be of the whole premises and not part. It was, [NAME] [NAME] said, clearly [NAME]’s intention to create “tight restrictions on what sub-tenants can do.” It was submitted also that there were very good commercial reasons why a person in [COMPANY]’s position might wish to impose an absolute covenant, not least of which is the ability to charge for the release of same.

20. It was drawn to our attention that the licence appeared to have been prepared by [NAME] and that [NAME] had acted for the [NAME]. Both eminent law firms and experts in the field of residential leasehold and it was submitted that it would be inconceivable that they would have agreed to clause 3.3 of the licence covenant if it was intended to be a qualified covenant.

Accordingly, there was no obvious mistake.

21. [NAME] [NAME] then went on to deal with the implication of a term rather than the interpretation of same. Here the cases of [NAME] and [NAME] v [COMPANY] were of assistance and sections of the judgments were recited, which we will return to as necessary in the findings section of the decision. In essence, however, it was [NAME] [NAME] submission that there was no possible basis for implying a term in the present case nor was there any business efficacy that needed to be considered and to be read into the Licence.

22. He expanded on these points in his verbal submissions to us. He reminded us that no correspondence had been produced by the Respondents at the time of the

7 grant of the overriding lease [NAME], which in certain circumstances is inadmissible but may have been of some assistance.

23. In response [NAME] [RESPONDENT] on behalf of the [NAME] [NAME], [NAME] and [NAME], drew to our attention that the covenants in the [NAME] are as those in the [NAME] containing a fully qualified covenant against assignment or subletting with approval of the landlord. His submission was that the Licence properly interpreted did not prevent the [NAME] from dealing with the property.

24. He set out five principles which we should consider and they were as follows:

• The documents are to be interpreted in the light of all the surrounding facts known to both parties at the date of the document. • That it includes contemporaneous documents forming part of the same transaction which are to be read together as a single document. • The apparent inconsistencies are to be resolved by giving effect of that part which is calculated to carry into effect the main purpose of the transaction as a whole. • The obvious mistakes in the drafting can be corrected as a matter of construction. • That a term may be implied where it is necessary to give the transaction commercial coherence.

25. After reciting the history of the dealings between the companies and [NAME]

and the involvement of [NAME] [APPELLANT], he was of the view that the licence at clause

3.3 omitted wording which was obviously a mistake on the part of the draftsman.

His submission was that it would make no sense whatsoever to enter into an

underlease for over 100 years intending to govern the right to occupy from 2023.

The licences he submitted were part of a transaction entered into where it was

known that [NAME] [APPELLANT] was about to become the landlord for the purposes of

clause 3.3 of the licence and the [NAME] and 2. An absolute prohibition on alienation

in one document would be wholly inconsistent with the qualified prohibition in

another. It was said that the Licence and [NAME] were contemporaneous documents

and part of the same transaction and should therefore be read together.

26. He then went to outline the basis upon which we could correct mistakes by

construction and referred to the case of East v [COMPANY]

[1982]2EGLR111. The judgment of Lord Justice Brightman says that two

conditions must be satisfied. First there must be a clear mistake on the face of

the instrument. Secondly it must be clear what correction ought to be made in

order to cure the mistake. If those conditions are satisfied then the correction is

made as a matter of construction. It was suggested to us that we must take into

account such evidence of background facts as would be admissible in order to

interpret the document, which include the aim and genesis of the transaction but

that no evidence of subjective intention of the parties or evidence of the

negotiations could be accepted.

27. Alternatively, we should imply wording into the contract which removed any

inconsistency or absurdity. That wording would be that clause 3.3 of the licence

would be amended to include “without the landlord’s consent, not to be

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unreasonably withheld.” The implication of this term would be to satisfy the

business efficacy test. In verbal submissions to us he repeated elements of the

skeleton argument. He reminded us that Dr and Mrs [NAME] had undertaken

the creation of the [NAME] to secure their occupancy, they having spent a good deal

of money on the flats, one of which was intended to be their London home and

another had provided a home for their son. He referred us to the inter-

relationship between the [NAME] and [NAME] and drew to our attention some of the

wording such as 'supplemental', 'collateral' and cross-reference between the

various documents. He accepted that the [NAME] did not comply with the provisions

of [NAME] in that it was a lease of more than 20 years. Clearly it was the intention to

create a lease in the same terms of the [NAME] and indeed at clause 3.2 of the licence

the following wording is to be found under the heading Not to Commit Breach of

Lease:

“3.2 Not to do or permit to do or suffer to be done or omitted at or in relation to the premises any act or thing which would or might cause the tenant to be in breach of or which if done or omitted or suffer to be done or omitted by the tenant would or might constitute a breach of the [NAME]’s obligation in the lease.”

28 This clause comes under the heading for clause 3 of [NAME]’s covenants. In

effect, therefore, this bound the [NAME] to the terms of the [NAME]. However,

his submission was that underletting by the [NAME] would not be breach of the

[NAME]. The alienation clause prevented any use save by the [NAME] for their

own use of the property and for a lease with 110 years left to run this, he

submitted, was impracticable and absurd. The granting of the lease between the

companies was made with the original section 13 notice in mind and before the

Court of Appeal had made their findings known on the ability to amend.

29. The indications were that [NAME] [APPELLANT] would become the landlord in place of

[COMPANY] and the landlord under the [NAME]. The intention was to avoid this causing

problems with alienation and the whole exercise was to enable the Respondents

to continue to occupy under the terms of the occupation leases. His submission

was that on the face of it, the present situation as submitted by the Applicants

was an absurdity. You were faced with 111 year lease with an absolute prohibition

against assignment, the covenant was inconsistent between those two leases and

that it could be nothing but a drafting mistake.

30. He took us through the various authorities but also drew our attention to the

textbook by [NAME] and various sections therein. He reminded us that it was

said that a document executed contemporaneously with, or shortly after, the

primary document to be construed may be relied upon as an aid to construction if

it forms part of the same transaction as the primary document. This textbook

also referred to the East v Pantiles case and the judgment of Lord Justice

Brightman which we have referred to above. That textbook also goes on to say

that if it is not clear what correction should be made the court cannot intervene.

He reminded us that pre-contractual correspondence was not admissible and

therefore had not been disclosed in this case.

31 Under the question of implication, he submitted that this was similar to

interpretation but that implication meant adding. He referred us to the [NAME]’s case and the need for business efficacy to be achieved. He

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reminded us again that the Licence and the [NAME] contained differing wording and

that no-one would take a lease for 100 years which you could do nothing with.

Indeed, he posed the question, why would [NAME] want to impose such a

restriction when it was not contained in the [NAME]. The policy document which we

had referred to earlier from [NAME] applied to short leases. There had he said

been a mistake by both solicitors and it would be correct to put that right by

construction and/or implication. He accepted, however, the burden of proof

rested with the party who alleges such “absurdity.”

32. In response, [NAME] [NAME] indicated that it was apparent to all concerned that [NAME]

[APPELLANT] would become the owner of both leases. However, the promises were

not made to [NAME] [APPELLANT] but to [COMPANY]. The consents related to a transfer

between companies controlled by Dr and Mrs [NAME]. The point of creating

the [NAME] was to block [NAME] [APPELLANT]. The section 42 notice gave the protection to Dr

and Mrs [NAME] as the new leases would be granted to them on the same terms

as the existing one, which contained very little prohibition against assignment

save for the last seven years of the term. To all intents and purposes, therefore,

his submission was that the [NAME] and 2 would become inconsistent and somewhat

irrelevant.

33. He submitted that whilst he accepted that [NAME] had been asked to help Dr

and Mrs [NAME] this was to be a “one off” hence clause 3.3 in the licence. If

there was a mistake, it was not obvious as to what is was. He also reminded us

that even though the clause would stop commercially renting it would not prevent

the transfer of the Property by use of a company vehicle.

34. As a matter of comment on the question of disclosure, his view that

correspondence would be admissible to show what facts were known to the

parties. These were professionally drafted documents.

FINDINGS

35. We are grateful to [NAME] [NAME] and [NAME] [NAME] for their eloquent submissions

made to us both in writing and at the hearing. We can see force in both sides. In

reaching our decision we have taken into account the various cases cited to us.

We have also noted the judgment of Carnworth LJ in [COMPANY] v Network Rail

in which it was said that in deciding whether there is a clear mistake the Court is

not confined to reading the document without regard to its background or

context. As the exercise is part of a single task of interpretation, the background

and context must always be taken into consideration. What was required of us it

appears was “that there should be something has gone wrong with the language

and that it should be clear what a reasonable person would have understood the

parties to have meant.” However, it has been said in further cases that it is

something wrong with the language as opposed to the implementation of the

bargain.

36. The decision of [NAME] v [NAME] and the judgment of Lord [NAME] was

referred to us in some detail. In his judgment he emphasized seven factors to be

taken into account. At paragraph 17 of case report he confirmed that reliance

on commercial common-sense and the surrounding circumstances should not be

invoked to under value the importance of the language which is to be construed.

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As he said, save in very unusual cases the parties must have been specifically

focussing on the issue covered by the provision when agreeing the wording of that

provision. At paragraph 18 he said as follows: “Secondly, when it comes to

considering the centrally relevant words to be interpreted, I accept that the less

clear they are, or to put it another way, the worse their drafting, the readier the

Court can properly be to depart from their natural meaning. That is simply the

obverse of the sensible proposition that the clearer the natural meaning the

more difficult it is to justify departing from it. However, that does not justify

the Court embarking on an exercise of searching for let alone constructing,

drafting infelicities in order to facilitate the departure from the natural

meaning. If there is a specific error in drafting it may often have no relevance

to the issue of interpretation which the Court has to resolve.” The judgment then

sets out the remaining points that should be considered in dealing with the

interpretation of the contract.

37. In the [NAME] v Persimmon case it was held that the Court would not easily

accept that linguistic mistakes had been made in formal documents, but if the

context and background drove the Court to conclude that something had gone

wrong, then applying the reasonable person review changes could be made and

corrections of mistake undertaken. The judgement also dealt with the admission

of previous communications between the parties and accepted that evidence of

pre-contractual negotiation was not admissible in support of construction of the

contract.

38. In the East v Pantiles case it was said by Brightman LLJ that there were clear

authorities that a mistake in a written instrument can in certain [COMPANY]

circumstances be corrected as a matter of construction without an action for

rectification. However, two conditions must first be satisfied; one, that there

must be a clear mistake on the face of the instrument and secondly, that it must

be clear what correction ought to be made to cure the mistake. If those are not

clear, then an [NAME] for rectification should be made. We noted also the

decision of the Supreme Court in [NAME] as to implication of terms

and [NAME] v [ADDRESS] which set out the basis upon which the plain and

ordinary meaning of words used in a commercial contract could be displaced.

39. The background to the licence consent and the grant of the [NAME] is clearly on the

basis that [NAME] [APPELLANT] had issued a section 13 notice to the surprise of Dr and Mrs

[NAME] who were concerned to ensure that they could maintain their position

in the Property, notwithstanding this course of action by [NAME] [APPELLANT], which

appears to have been contrary to discussions that they had previously.

40. The solicitors acting on behalf of Dr and Mrs [NAME] and their companies

devised the plan, largely as a result of [NAME] [APPELLANT]’ failure to register the original

section 13 notice, which enabled further overriding leases to be created. These

leases did not form part of the original section 13 notice. With changes to the

occupational leases by Dr and Mrs [APPELLANT] it meant that [NAME] [APPELLANT] would be

unable to subsequently serve a section 13 notice as there was insufficient

[NAME] tenants. However, this was overcome by some tactical movement on

leasehold interests to enable a fresh section 13 notice to be issued in February of

2018. In that intervening period, in fact in February of 2015, section 42 claims

had been issued by Dr and Mrs [NAME] to seek extensions to their occupational

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leases until 19th September 2113. These would be nine years short of the terms of

the [NAME]. Nonetheless, it would give them a period of occupancy, which would,

we suggest, see them off this mortal coil and as a result of the terms of the

occupational leases include little or no prohibition against subletting or

assignments.

41. The licence to underlet is between [COMPANY] and two of the companies controlled by

Dr and Mrs [RESPONDENT]. In the Licence [COMPANY] are referred to as the landlord, in

the copy we have [NAME] is the tenant and [NAME] the [NAME]. The Licence is

said to be supplemental to the underlease, which is defined in schedule 2 as

that dated 31st January 2005 made between [COMPANY] and [NAME]. This Licence is

said to be supplemental and collateral to that lease. The Licence is on the basis

that the landlord has agreed to grant consent on the terms set out below, to an

underletting of the premises to the [NAME] [NAME] until 14th September 2122.

The term of the underlease is annexed to the Licence.

42. The [NAME]’s covenants are set out at paragraph 3, which include an

obligation to comply with the underlease and to pay rents reserved, not to do

anything which may cause [NAME] to be in breach of the obligations under the 2005

lease and, importantly for the purposes of this case, not to assign charge underlet

or part with or share possession or occupation of the whole or any part of the

premises. There then follows a tenant’s covenants which includes an obligation

to enforce compliance by the [NAME] with the obligations in the underlease.

We have already set out the wording in the underlease concerning the ability to

assign or sublet and there is no doubt that on the face of the [NAME] and the licence

covenant there is inconsistency between the subletting provisions. However, it

seems to us that the Licence is made by reference to the underlease dated 31st

January 2005. That contains at paragraph 16 the following wording:

“The tenant will not grant any underlease of the premises:

16.1 for a term less than six months or exceeding 20 years,

16.2 on terms less onerous than those in this lease, nor

16.3 unless its terms prohibit absolutely any further assignment underletting

charging or parting with or sharing possession or occupation of the whole or

any part of the premises.”

43. In this case it seems to us that the consent that is being granted by [COMPANY] is to

[NAME] to create an underlease for more than 20 years which is on terms no less

onerous than those in the original [NAME] but which prohibits further assignments,

sublettings etc. That is exactly what the Licence says. That is consistent it seems

to us, and we find, with the provisions of the [NAME]. The error in this case seems to

rest with the provisions of the [NAME] that mirror the [NAME] subletting provision.

When one considers the restrictions on subletting which were imposed by

[NAME] in the 2008 document, which we have referred to above, and the fact

that the real intention in this was to prevent [NAME] [APPELLANT] from proceeding with a

collective enfranchisement, the [NAME] and the licence seem to us to be consistent.

Furthermore, the licence prepared by [NAME] [NAME] is, we assume, as they

intended. The underlease is prepared by [NAME[NAME]. Both firms of

solicitors are acknowledged experts in this realm. If it is such a glaring error we

do not understand why it was not corrected at the time.

12 44. We need to be satisfied that there is a clear mistake presumably either in the

Licence or in the [NAME]. The Licence is quite clear in its language and we accept

[NAME] [NAME] submission that it makes commercial sense for [COMPANY] to include

such a restriction when seeking to help Dr and Mrs [APPELLANT] avoid the actions of

[NAME] [APPELLANT]. In so helping, why should [COMPANY] not take advantage of any

payment that may come from a licence to assign. That ability to grant a licence to

assign would, on the basis of the values attributed by the parties in this case,

appear to be quite substantial and may be something that would be borne in

mind on any enfranchisement. We do accept that in 2011 the question of the

section 13 notice then issued was still in the air but we are satisfied that the

advice given to Dr and Mrs [NAME] by [NAME] resulting in these [NAME]

remove that as a potential threat. In those circumstances, [COMPANY] would remain

the prospective landlord for some time. There is, therefore, business efficacy in

them including such a provision in the licence to underlet. Further, the inclusion

of that provision is not inconsistent with the terms of the [NAME].

45. If the [NAME] contains a mistake then it seems to us that mistake is not to reflect the

Licence wording. Accordingly, a correction to include in the [NAME] the Licence

wording would be of no assistance to the Respondents.

46. We find, therefore, that the wording of the licence to underlet is quite clear and

does not in our findings create a mistake that we can resolve. Furthermore, if

rectification is sought, that is not within our jurisdiction. There is no implication

it seems to us that we can carry forward. The wording proposed by [NAME] [NAME] as

being inserted into the licence would in our finding be inconsistent with the

provisions for underletting contained in the [NAME] and the Licence itself. In those

circumstances, it does not seem to us that we can correct any document by way of

implication.

47. On the question of business efficacy, the [NAME] are held by [COMPANY] companies and

it seems to us it would be possible for those shares to be transferred to another,

which would allow a continued occupation of the premises. Furthermore, it

would be open to the companies owned by Dr and Mrs [NAME] to reach some

agreement with [COMPANY], or subsequently [NAME] [APPELLANT], to have the restriction on

alienation removed. However, that is perhaps not a step that needs to be

contemplated. If the section 42 notice is proceeded with, both Dr and Mrs [NAME] will have leases for a substantial period of time, only some nine years

less than the [NAME], with which they can occupy their flats with little or no

prohibition against subletting save in the last seven years. In those

circumstances, therefore, we prefer the arguments of the Applicants in this case

and conclude that the values payable for the [NAME] are as set out in the

supplemental statement of agreed facts, namely £3,035.000 for Flat 3,

£1,085,000 for Flat 4 and £1,025,000 for Flat 5.

Andrew Dutton Judge:

A A Dutton Date: 7th February 2019

13

ANNEX – RIGHTS OF APPEAL

1. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber) then a written [NAME] for permission must be made to the First-Tier at the Regional Office which has been dealing with the case.

2. The [NAME] for permission to appeal must arrive at the Regional Office within 28 days after the Tribunal sends written reasons for the decision to the [NAME].

3. If the [NAME] is not made within the 28-day time limit, such [NAME] must include a request to an extension of time and the reason for not complying with the 28-day time limit; the Tribunal will then look at such reason(s) and decide whether to allow the [NAME] for permission to appeal to proceed despite not being within the time limit.

4. The [NAME] for permission to appeal must identify the decision of the Tribunal to which it relates (ie give the date, the property and the case number), state the grounds of appeal and state the result the party [NAME] the [NAME] is seeking.

14 LON/00BK/OCE/20189/0179

45-47 [ADDRESS], [POSTCODE]

Schedule of overriding leases

[NAME]'s Overriding lease of the 3rd and 4th floor flat dated 31st January 2005 made between [COMPANY] (1) and [COMPANY] (2) for a term commencing on 31st January 2005 and expiring on 25th September 2122.

Overriding lease of the 4th floor flat dated 31st January 2005 made between [COMPANY] (1) and [COMPANY] (2) for a term commencing on 31st January 2005 and expiring on 25th September 2122.

Overriding lease of the 5th floor flat dated 31st January 2005 made between [COMPANY] (1) and [COMPANY] (2) for a term commencing on 31st January 2005 and expiring on 25th September 2122.

[NAME]'s

Overriding lease of the 3rd and 4th floor flat dated 7th April 2011 made between [COMPANY] (1) and [COMPANY] (2) for a term commencing on 7th April 2011 and expiring on 15th September 2122.

Overriding lease of the 4th floor flat dated 7th April 2011 made between [COMPANY] (1) and [COMPANY] (2) for a term commencing on 7th April 2011 and expiring on 15th September 2122.