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||Neutral Citation Number:  EWCA Civ 1669
||Case No: B2/2004/0617 CCRTF; B2/2004/0617/B FC3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON
(His Honour Judge Cooke)
||Royal Courts of Justice
Strand, London, WC2A 2LL
||15 December 2004
B e f o r e :
LORD JUSTICE WARD
LADY JUSTICE ARDEN
LORD JUSTICE JACOB
|| 7 Strathray Gardens Ltd
||- and -
||Pointstar Shipping & Finance Ltd
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Jonathan Gaunt QC (instructed by Glinert Davis) for the Appellant
Anthony Radevsky (instructed by Wallace & Partners) for the Respondent
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Lady Justice Arden:
- This is an appeal by the defendants in this action against the order of HHJ Cooke sitting in the Central London County Court dated 12 February 2004. The appellants own the freehold of 7 Strathray Gardens, London NW3 ("the premises"). The premises are leased to a number of tenants who served a notice of collective enfranchisement served on behalf of the tenants of the premises pursuant to section 13 of the Leasehold Reform, Housing and Urban Development Act 1993 ("the 1993 Act"). This appeal concerns the validity of the landlords' counter-notice served in response. The judge held that the landlord's notice did not comply with the mandatory statutory requirements for such notice and that accordingly under section 25 of the 1993 Act the tenants' nominee purchaser ("the company"), which is the respondent to this appeal, was entitled to acquire the freehold and leasehold interests in the premises on the terms contained in the tenants' notice dated 4 March 2003. The non-compliance in question was the failure by the landlords to state in their counter-notice whether the premises were in the area of a scheme approved as an estate management scheme under section 70 of the 1993 Act. In fact, they were not and so the counter-notice should have contained a negative statement that the premises were not in such an area. As explained below, this requirement is not in the 1993 Act. It was imposed for the first time by regulations made in 2002. I refer below to an estate management scheme as an "EMS". References to the 1993 Act are to the 1993 Act prior to amendment by the Commonhold and Leasehold Reform Act 2002.
The statutory provisions
- Section 21 of the 1993 Act provides for the service of a landlord's counter-notice. Section 21(1) is important. It provides:-
"(1) The reversioner in respect of the specified premises shall give a counter-notice under this section to the nominee purchaser by the date specified in the initial notice in pursuance of section 13(3)(g)."
- Where the landlord admits that the participating tenants were on the relevant date entitled to exercise the right to collective enfranchisement in relation to the premises specified in the tenants' notice, the landlord's counter-notice must contain a statement that the landlord so admits (section 21(2)(a)). In that event, section 21(3) requires that such counter-notice must in addition:-
"(a) state which (if any) of the proposals contained in the initial notice are accepted by the reversioner and which (if any) of those proposals are not so accepted, and specify-
(i) in relation to any proposal which is not so accepted, the reversioner's counter-proposal, and
(ii) any additional leaseback proposals by the reversioner;
(b) if (in a case where any property specified in the initial notice under section 13(3)(a)(ii) is property falling within section 1(3)(b)) any such counter-proposal relates to the grant of rights or the disposal of any freehold interest in pursuance of section 1(4), specify-
(i) the nature of those rights and the property over which it is proposed to grant them, or
(ii) the property in respect of which it is proposed to dispose of any such interest,
as the case may be;
(c) state which interests (if any) the nominee purchaser is to be required to acquire in accordance with subsection (4) below;
(d) state which rights (if any) [any] relevant landlord, desires to retain-
(i) over any property in which he has any interest which is included in the proposed acquisition by the nominee purchaser, or
(ii) over any property in which he has any interest which the nominee purchaser is to be required to acquire in accordance with subsection (4) below,
on the grounds that the rights are necessary for the proper management or maintenance of property in which he is to retain a freehold or leasehold interest; and
(e) include a description of any provisions which the reversioner or any other relevant landlord considers should be included in any conveyance to the nominee purchaser in accordance with section 34 and schedule 7.
(4) The nominee purchaser may be required to acquire on behalf of the participating tenants the interest in any property of any relevant landlord, if the property-
(a) would for all practical purposes cease to be of use and benefit to him, or
(b) would cease to be capable of being reasonably managed or maintained by him,
in the event of his interest in the specified premises or (as the case may be) in any other property being acquired by the nominee purchaser under this Chapter.
(6) Every counter-notice must specify an address in England and Wales at which notices may be given to the reversioner under this Chapter …"
- Accordingly, section 21 contains no reference to matters required to be stated in a landlord's counter-notice otherwise than under that section.
- Section 25(1) provides:-
"(1) Where the initial notice has been given in accordance with section 13 but -
(a) the reversioner has failed to give the nominee purchaser a counter-notice in accordance with section 21(1), or
(b) if required to give the nominee purchaser a further counter-notice by or by virtue of section 22(3) or section 23(5) or (6), the reversioner has failed to comply with that requirement.
the court may, on the application of the nominee purchaser, make an order determining the terms on which he is to acquire, in accordance with the proposals contained in the initial notice, such interests and rights as are specified in it under section 13(3)."
- As appears below, the judge held that, because of the non-compliance referred to in paragraph 1 above, the landlord's counter-notice was not in accordance with section 21(1) of the 1993 Act.
- The 1993 Act confers a power on the Secretary of State by secondary legislation to prescribe the form of notices to be given under Part I of the 1993 Act and in addition to prescribe the particulars in any such notice. This power is conferred by section 99(6) of the 1993 Act, which is in the following terms:-
"(6) The Secretary of State may by regulations prescribe:-
(a) the form of any notice required or authorised to be given under this Part; and
(b) the particulars which any such notice must contain (whether in addition to, or in substitution for, any particulars required by virtue of any provision of this Part)."
- Section 100 provides:-
"(1) Any power of the Secretary of State to make orders or regulations under this Part –
(a) may be so exercised as to make different provision for different cases or descriptions of cases, including different provision for different areas; and
(b) includes power to make such procedural, incidental, supplementary and transitional provision as may appear to the Secretary of State necessary or expedient.
(2) Any power of the Secretary of State to make orders or regulations under this Part shall be exercisable by statutory instrument which (except in the case of regulations making only such provision as is mentioned in section 99(6)) shall be subject to annulment in pursuance of a resolution of either House of Parliament."
- Accordingly, any regulations made under section 99(6) are subject to the affirmative procedure.
- The Secretary of State has not exercised the power conferred by section 99(6)(a). However, on 20 December 2002, the Secretary of State made the following regulations (referred to below as "the 2002 regulations"):-
"Citation, commencement and extent
1. (1) These Regulations may be cited as the Leasehold Reform (Collective Enfranchisement) (Counter-notices) (England) Regulations 2002 and shall come into force on 10 April 2003.
2. These Regulations extend to England only.
3. In these Regulations-
'the 1993 Act' means the Leasehold Reform, Housing and Urban Development Act 1993;
'the specified premises' has the same meaning as in section 13(12)(a) of the 1993 Act.
Additional content of reversioner's counter-notice
4. A counter-notice given under section 21 (reversioner's counter-notice) of the 1993 Act shall contain (in addition to the particulars required by that section) a statement as to whether or not the specified premises are within the area of a scheme approved as an estate management scheme under section 70.
5. These Regulations shall apply to counter-notices given under section 21 on or after the date these Regulations come into force.
Signed by authority of the First Secretary of State
Parliamentary Under Secretary of State, Office of the Deputy Prime Minister
20 December 2002
(This note is not part of the Order)
A person who receives a notice for a claim for collective enfranchisement made under Part I of the Leasehold Reform Housing and Urban Development Act 1993 must respond by giving a counter-notice admitting or opposing the claim. These Regulations prescribe a requirement, in addition to those specified in section 21 of the Act, as regards the contents of the counter-notice.
These Regulations only apply to counter-notices given on or after the date these Regulations come into force.
 1993 c.28. The Secretary of State can exercise the power under this section only in relation to England; see article 2 of, and schedule 1 to, the National Assembly for Wales (Transfer of Functions) Order 1999 (S.I. 1999/672)."
- The National Assembly for Wales has passed regulations in the same form save that:-
(1) references to Wales are substituted for references to England,
(2) the regulations are made in English and Welsh, and
(3) the word "shall" in the key paragraph, paragraph 4, is replaced by the imperative word "must": see Leasehold Reform (Collective Enfranchisement) (Counter-Notices) (Wales) Regulations 2003 (W139).
Background to the 2002 regulations
- Not all premises which may be subject to collective enfranchisement are the subject of an EMS. The essence of an approved EMS for present purposes is that it enables a landlord to continue to have powers of management in respect of premises even after collective enfranchisement has taken place: 1993 Act, section 69(1). Indeed, such a scheme may give the landlord power to carry out works necessary to secure compliance with the EMS: section 69(3). The costs will be borne by the owners or the lessees of the premises. The landlord may have a charge over the premises under the scheme to secure rights conferred on him by the scheme. In that event he has the same powers and remedies as a mortgagee under the Law of Property Act 1925: section 69(3).
- The judgment of the judge contains some useful background on EMSs in general, and the events leading to the making of the 2002 regulations:-
"12. Estate management schemes are an important part of leasehold enfranchisement and go back as regards leasehold houses only to the Leasehold Reform Act of 1967. Now under the 1993 Act, schemes apply both to houses and to Chapter 1 acquisitions; 1967 schemes have to be approved by the court; schemes under the present Act go to the LVT. Their purpose is reasonably obvious: the landlord of a leasehold estate generally manages it with common systems of covenants, both positive and negative, designed to further the good management of the estate as a whole. It represents a local form both of servicing and of planning control. By way of a simple example, the landlord of an estate where the appearance of the premises is homogenous will want to keep things that way if he can. Where (as in the areas round this court) there are groups of buildings uniformly of cream stucco, it would be a disaster if one or two enfranchised buildings were to be painted pink or purple! Such schemes of course extend to many matters beyond mere appearance, and knowledge of them with their provisions can be of significance to an acquiring tenant or group of tenants. They are registered as local land charges.
13. It would appear from the consultation paper that preceded the 2002 regulations, that concern had been expressed about the failure of the notice provision to disclose, at least at the notice stage, the existence of such schemes. It is useful, perhaps, just to see what the consultation paper said. In para.3 the part headed "Background", it is said:
'The government believes the landlord's notice does not currently provide sufficient information to leaseholders, and representations have been made by leaseholders which have been voiced in Parliament supporting this view, in particular from leaseholders of houses. We therefore believe that the landlord's notice will be of greater benefit to leaseholders if it includes two additional pieces of information. These relate to the existence of any estate management scheme and in the case of houses [something else which in the event did not happen] provided leaseholders with this additional information should help them reach a more informed decision with regard to further proceedings'
Then it set out how estate management schemes work, and it ended at the end of para.4 with the words:-
'We feel the leaseholder should be made aware of this at an early stage in the enfranchisement process.'
It was following the consultation, no doubt as a result of advice he received, that the Secretary of State made the regulations that he did."
- Mr Anthony Radevsky, for the respondents, has informed this court that the question whether the counter-notice of the landlord should contain a statement as to whether the property is subject to an EMS was one of the issues raised by Baroness Gardner of Parks in the House of Lords (vol.628, no.44, col.499, 13 November 2001). Lord McIntosh of Haringey, the government spokesman, replied in the House that he would write to Baroness Gardner. We understand that, when he did so, he stated that her concerns could be met by secondary legislation. That led to the discussion paper referred to by the judge and to the making of the 2002 regulations.
The judgment below
- The particular issue before the judge which is raised by this appeal is the question of the effect on the landlord's counter-notice of the landlord's failure to include a statement in that notice that the premises were not subject to an EMS. The crucial passage in the judge's judgment is as follows:-
"39. … It seems to me first of all, picking up from what I have said a few paragraphs ago, that the whole fasciculus of [section 21(3)] b) – (e) is intended to give tenants as clear a picture as possible of what landlords are trying to require, and at least in one case at (c) be able to insist on and will be arguing for. Tenants can then make their mind up how to proceed. The object as I see it is to get the whole potential bargain together in one place and one time and indeed to inhibit other matters from being brought in later. To do this properly, landlords and conveyancing solicitors will have a lot of work to do, and the statutory two months may not be a minute too long. In short, this to my mind is the answer to the question – what is it for?
40. If one paused there, I would have thought it was almost unarguable that (b) – (e) were mandatory. They are all essential to the formulation and ultimate bargain, and to leave any of them out falsifies the whole. It would be difficult and inaccurate to describe any of them as machinery, much less as merely supportive. It may be useful to compare them with the requirement in a section 21 notice in sub-section 6, that there be an address for notices which to my mind seems exactly the sort of thing likely to be directory on machinery. In fact a rather good example of the sort of thing likely to be machinery, it does not go with the transaction at all, it simply facilitates business. It would be extraordinary if a failure to give that address invalidated the notice.
41. To my mind the key to it is really this: the paragraph 4 statement is not in truth a free-standing matter. Mr Dutton has very much addressed me on the basis of one looks at it, says this is a small piece of information with defects of the requirements whose omission does not really matter, just perhaps like the sub-section 6 address. But I prefer Mr Radevsky's analysis that one has to look at it as forming part of the (b) – (e) fasciculus and impacting upon it. I accept that knowledge of whether or not there is a scheme [is] important as it affects such matters as (d) rights retained by landlords, putting it simply if there is a scheme such provision will effectively be non-negotiable, something tenants need to know early so they can evaluate their position. To my mind, this is strongly in favour of the provision being mandatory, it goes to the transaction, part of the machinery for affecting it.
42. My conclusions, from the reasons I have sought to give, are that this is a mandatory requirement which the landlords failed to meet. The section 21 notice is accordingly invalid."
- Mr Jonathan Gaunt QC, for the appellants, points out that if the judge's decision is correct, the nominee purchaser selected by the tenants will be entitled to acquire the premises on the terms of the tenants' initial notice under section 13. In those circumstances, the price and the terms of the conveyance would thus not be determined by the leasehold valuation tribunal. The price put forward by the tenants in the present case is some £117,000 less than that for which the landlords contend.
- Mr Gaunt submits that paragraph 4 of the 2002 regulations constitutes a directory requirement only, and that the failure to comply with it, therefore, does not invalidate the notice. As to the law on mandatory and directory requirements, Mr Gaunt relies on Howard v Bodington (1877) 2 PD 203 at 10-1 (a decision of the Court of Arches). The question is one of the real intention of the legislature. He further relies on the judgment of Millett LJ in Petch v Gurney  3 All ER 731, and on Tudor v M25 Group Ltd  1 WLR 2319, a recent decision of this court. That case concerned a notice under the Landlord and Tenant Act 1987 (as amended). The landlord had to serve notice of his acquisition of the reversion of premises on tenants of the premises. The 1987 Act then gave the tenants the right to apply for certain information from the landlord. That notice had to give particulars of the tenants' addresses. That information was omitted and the landlords claimed that the notice was invalid. This court held that the requirement was not mandatory, and that accordingly the notice was valid. This court adopted the reasons of the judge and additionally relied on the judgment of Hobhouse LJ in Belvedere Court Management Ltd v Frogmore Development Ltd  QB 858. Among other matters Hobhouse LJ attached significance to the fact that the information was readily and indisputably ascertainable. Likewise, in the present case, Mr Gaunt submits that it is not difficult for the tenants to find out if there is an estate management scheme. That information can be ascertained from the local Land Charges Office at the local authority. In Mr Gaunt's submission, the existence of an EMS usually raises the value of the property.
- Mr Gaunt relies on the scheme of the Act. Section 25(1) of the 1993 Act confers power on the court to determine the terms for the acquisition of the freehold where the reversioner has failed to give a notice at all. However, it contains no such power where the counter-notice fails to comply with the Act. In his submission, it is wholly disproportionate and arbitrary if the failure to state that premises are in an EMS results in the landlord's counter-notice being invalid.
- Mr Gaunt submits that the question whether the property is in an EMS is peripheral. It does not go to the entitlement of the tenants to acquire the freehold reversion. It is not a piece of information which the tenant requires at the counter-notice stage. The information represents a non-negotiable matter as between the landlord and tenant. The tenant is bound to know whether the property is in an EMS by the time he comes to acquire the property by means of a form of conveyance.
- Mr Gaunt also submits that the point that the 2002 regulations apply only to EMSs under the 1993 Act and not to EMSs under earlier legislation is another indication that Parliament did not intend paragraph 4 of the 2002 regulations to be a mandatory requirement.
- Mr Gaunt relies on the draft regulatory impact assessment attached to the discussion paper. On his submission, this assumed that the requirement will be directory only since it talks only about the risks of non-compliance so far as the tenant is concerned. We have not been shown the regulatory impact assessment as attached to the 2002 regulations when submitted to Parliament. In addition, in calculating the costs of a measure, it seems to me not illogical for the executive to proceed on the basis that the landlord will comply with the measure. For those reasons, I do not propose to say more about this document.
- Mr Gaunt relies on the fact that the statement required is not simply a positive statement but a negative statement as well. He submits that that throws light on whether the requirement is mandatory or directory.
- Mr Gaunt also relies on the fact that the requirement to state whether the property is in an EMS was added some ten years after the Act was enacted. Accordingly, it cannot have been an essential part of the provisions of the Act. It serves a wholly secondary purpose. The information required may be relevant at the stage of valuation but it is not critical at the stage of the counter-notice.
- The judge thought that the result was "commercially fair". Mr Gaunt disputes that.
- Mr Gaunt further submits that if the court is against him on the interpretation of paragraph 4 of the 2002 regulations, the court would be bound to adopt his interpretation by virtue of section 3 of the Human Rights Act 1998. James v United Kingdom (1986) 8 EHRR 123 shows that article 1 of the First Protocol to the European Convention on Human Rights ("the Convention") is engaged where the landlord is deprived of the reversion. In that case, the European Court of Human Rights further held that the elimination of social injustice is a legitimate aim and falls within the state's margin of appreciation. However, the means must not be disproportionate to the aim and must be capable of being regarded as striking a fair balance.
- Mr Gaunt relies on Pennycook v Shaws (EAL) Ltd  2 WLR 1331. In the present case the legislature has not struck a balance between the interests of the landlord and those of the tenant. In pursuance of its interpretative obligation under section 3 of the Human Rights Act 1998, this court should construe paragraph 4 of the 2002 regulations as directory only.
- Mr Gaunt criticises paragraph 41 of the judgment of the judge. Essentially, the reasoning of the judge was to treat paragraph 4 as part of the "fasciculus" of requirements set out in section 21(3). Mr Gaunt submits that the judge fell into error because the question whether premises were subject to an EMS was simply part of the background. It formed no part of the landlord's proposals. That information is only relevant to the valuation at a later stage. The information required by paragraph 4 of the 2002 regulations is of a different quality from that required by section 21(3). Accordingly, the sanction should not be to shut the landlord out altogether from any say in the terms of acquisition. Mr Gaunt accepts that paragraph 4 cannot be breached with impunity. He submits that it is not too late for the tenant to serve a notice under section 92 requiring the landlord to make good the defect. The tenant can also search the local land charges registry. The present case is distinguishable from Burman v Mount Cook Land Ltd  Ch.256 because the requirement in the present case is not integral to the working of the Act. The sanction of invalidity is not proportionate to the means to be achieved.
- Mr Radevsky does not dispute Mr Gaunt's submissions as to the test to be applied as to whether a statutory requirement is mandatory or directory. He submits as follows: the tenants do not need to establish a residence condition or any condition as to ownership for the purpose of collective enfranchisement. This has been the case with effect from July 2002. Mr Radevsky submits that it would not be obvious to a tenant that a flat was within an EMS. It would be more obvious to the landlord, yet in this case the landlord did not know.
- Mr Radevsky submits that there was another proposal in the discussion paper of 2002 quoted above, namely that the landlord's counter-notice should state the basis of valuation used under the Leasehold Reform Act 1967 in connection with the enfranchisement of leasehold houses. This was implemented by SI 2002/3209. Mr Radevsky submits that it is sensible to have a negative statement and that the Secretary of State was entitled so to determine.
- Mr Radevsky's main submission is that the requirement in paragraph 4 of the Regulation is mandatory. If it were only directory, the landlord could ignore the requirement and serve a counter-notice. There would be no penalty applicable to the landlord. In effect, the court is being asked to ignore the 2002 regulations. If the court were to say paragraph 4 is directory only, there would be no force in the regulations. In practice, the tenants may not be content to discover that, far from being free from landlord control after enfranchisement, they will remain subject to it. Moreover, the cost of complying with the scheme may form an additional element of the service charge. It is deliberate statutory policy to put the onus of ascertaining whether there is an EMS on the landlord. This is made clear by the discussion paper. The fact that the tenant could obtain the same information by enforcing other statutory rights is not inconsistent with Parliament imposing a mandatory obligation on the landlord in the 2002 regulations.
- Mr Radevsky seeks to uphold the judge's conclusion in paragraph 41 of his judgment that paragraph 4 of the 2002 regulations is not free standing.
- Mr Radevsky submits that the existence of an EMS relating to the premises is relevant to the evaluation of the restrictive covenants. The tenants may not wish to be involved with the landlord following enfranchisement. They would be at risk as to their expenses of pursuing their application if they were told later and they withdrew because the information caused them to change their mind.
- Mr Radevsky submits that the fact that paragraph 4 is the only substantive provision in the statutory instrument should lead the court to conclude that it is mandatory: otherwise the whole statutory instrument is rendered optional. In a number of schemes, there are provisions that a flat will only be used as a single dwelling. There is often a proviso that other uses may be permitted if they are permitted by instrument of transfer to the tenant of the freehold. This, on Mr Radevsky's submission, highlights the need for early information. This point was not, however, identified in the discussion paper as a reason for the 2002 regulations. In those circumstances, in my judgment, this court cannot proceed on the basis that this seemingly arcane point was one of the reasons why the 2002 regulations were enacted.
- As to Mr Gaunt's reliance on section 3 of the Human Rights Act, Mr Radevsky relies on a number of cases in which the European Court of Human Rights and domestic courts has found that there is no breach where the legislature has laid down a statutory procedure with penalties on both sides for default. Under article 1 of the First Protocol to the Convention, there is a wide margin of appreciation for the member state, allowing them to introduce socially beneficial legislation. An applicant has to discharge a high burden if he seeks to show that the legislation is disproportionate. Mr Radevsky submits that Wilson v First County Trust (No.2 Ltd)  1 AC 816 is closest to the present case. In Mellacher v Austria (1989) 12 EHRR 391, the European Court of Human Rights held that it was not enough that the legislature could have enacted a different scheme.
- Mr Radevsky submits that, although the discussion document did not refer to any sanction, it must be taken that that would be known. Parliament had given the minister power to deal with deficiencies in the counter-notice.
- I start by examining the judge's basic premise, which is that paragraph 4 of the 2002 regulations is not a free-standing matter but is to be treated as part of the requirements of section 21(3). To do so I go back to section 99(6) set out above. Neither counsel has submitted that section 99(6)(b) is to be read as dependent upon the Secretary of State having prescribed a form in pursuance of his powers under section 99(6)(a) of the 1993 Act. However, two points may be noted about section 99(6). First the effect of the requirements as to the particulars to be included in the landlord's counter-notice imposed by an exercise of the powers conferred by section 99(6) cannot be different according to whether the Secretary of State has prescribed a form and requirements as to those matters, or has prescribed those matters without also requiring a particular form to be used. Second, the Secretary of State is not given power to make textual amendments to the Act. Had the Secretary of State been given such power, section 99(6) might have been described as a "Henry VIII" clause: see, for example, the special report of the House of Lords Select Committee on Delegated Powers and Regulatory Reform on Henry VIII powers to make incidental, consequential and similar provision (HL Paper 21, 2002-03).
- From these points, it follows, in my judgment, that paragraph 4 of the 2002 regulations is not to be treated as if it formed part of the requirements of section 21(3). It is a self-standing requirement. It is thus inappropriate to ask, as the judge asked, whether paragraph 4 is a mandatory requirement or a directory requirement through the prism of section 21(3).
- On the other hand, I record in passing that I accept the basis on which this case proceeded, namely that the provision in section 25(1)(a) that "the reversioner has failed to give the nominee purchaser a counter-notice in accordance with section 21(1)" includes the situation where the reversioner has (as here) served a counter-notice but that counter-notice does not comply with the mandatory requirements of section 21 and any regulations made pursuant to section 99(6). The judge envisaged the possibility of non-compliance with what he considered to be a directory requirement when he held that a counter-notice could be valid even if it did not comply with the requirements of section 21(6) as to the landlord's address. Where section 25(1)(a) applies and the court makes an order for acquisition, the terms of acquisition will be those in the tenants' initial notice (see the tailpiece to section 25(1) above). If the tenants' initial notice deliberately specifies an unrealistic sum, the tenants' initial notice will be invalid: Cadogan v Morris  1 EGLR 59. This provides some protection for the landlord if he fails to serve an appropriate counter-notice. However, it will only be available in an extreme case. It is not suggested that it would be available here.
- Neither the 1993 Act nor the 2002 regulations expressly state that a notice is not valid unless it complies with the 1993 Act or the 2002 regulations (as the case may be). They are silent on this point. The position is left to the courts to determine as a matter of the interpretation of those enactments.
- The foregoing considerations do not mean that paragraph 4 of the 2002 regulations is to be interpreted in isolation from the other statutory requirements as to the contents of the landlord's counter-notice. The point is simply that it is not to be construed as if it were inserted into section 21(3). The significance of section 21(3) is that it appears in the 1993 Act as originally enacted and therefore must be regarded as setting out the essential content of the landlord's counter-notice. Parliament did not amend section 21(3) to include a requirement in terms of paragraph 4 of the 2002 regulations when it amended the 1993 Act in 2002. Moreover, the extract from the discussion paper quoted by the judge and set out above confirms the point that the information as to whether or not the premises are within an EMS is not information which is essential to the operation of collective enfranchisement. Rather it is information which Parliament considers would be of benefit to tenants (and hence to the nominee purchaser). It was also Parliament's view that it would be beneficial to tenants if this information was given at the notice stage.
- The discussion paper does not deal with the need to make a negative statement that premises are not within an EMS. The reason for this is not clear. In the light of section 100, there does not seem to be doubt as to the power of the Secretary of State to make different provision for different classes of case. There are, I accept, regulatory reasons in other contexts for requiring a negative statement: it may impose a mental discipline or expose the maker of the statement to pressure to change his conduct by the prospect or fact of public disclosure. But it is difficult to see the social or economic policy behind the requirement for a negative statement in this particular case.
- I now turn to consider the relevant law. The legal test for determining whether a statutory requirement is mandatory or directory is common ground. In those circumstances, it is not necessary for me to set out all the authorities that have been cited for the court's assistance. The test is not one of the language that Parliament has used but of the substance of the requirement it has imposed. Thus the difference of wording between paragraph 4 of the 2002 regulations and the equivalent in the order of the Welsh Assembly is of no significance, even if the latter were to be relevant to the interpretation of the former (or vice versa).
- I have gained most assistance from Burman v Mount Cook Land Ltd  Ch.256 and Petch v Gurney  3 AER 731. As to the Burman case, I gratefully adopt the summary given by Carnwath LJ in the M25 case cited above:-
"16. … [Burman v Mount Cook Land Ltd] concerned a requirement under the Leasehold Reform, Housing and Urban Development Act 1993, for the landlord to serve a counter-notice saying whether or not the right to a new lease was admitted and, if so, which of the tenants' proposals were acceptable. The notice in question did not contain such a statement. The judge had upheld the notice on the basis that 'a reasonable tenant' would not have been misled. That decision was reversed in this court. Chadwick LJ , giving the leading judgment said that the answer could only be found by construing the statutory language in the context of the statutory scheme. Having reviewed the complex statutory requirements in detail he concluded that the landlords' counter-notice was 'integral' to the proper working of the statutory scheme, and the failure to comply with the statutory requirements was fatal to its validity."
- The decision in the Burman case does not turn on the mandatory/directory distinction. However, it is authority for the proposition that the effect of non-compliance with a particular statutory requirement must depend on the particular statutory scheme in point. This enables me to put to one side arguments on the differences between the scheme for landlord's counter-notices in the 1993 Act and that for landlord's counter-notices under the Leasehold Reform Act 1967 (leasehold houses).
- It also means that I must proceed on the basis that the purpose of the landlord's counter-notice is to give the information specified in section 21 and the 2002 regulations.
- I must also bear in mind the effect of non-compliance with a mandatory requirement. Under section 25, the court must proceed to value the interests to be acquired on the basis of the tenants' proposals unless their proposals are deliberately unrealistic. There is a measure of protection there for the landlord, but I would call it vanishingly small.
- The second authority which I have found of particular assistance on this appeal is Petch v Gurney, above. In this case Millett LJ, with whom Henry LJ agreed, illuminated the distinction between mandatory and directory requirements by these words:-
"The question whether strict compliance with a statutory requirement is necessary has arisen again and again in the cases. The question is not whether the requirement should be complied with; of course it should: the question is what consequences should attend a failure to comply. The difficulty arises from the common practice of the legislature of stating that something 'shall' be done (which means that it 'must' be done) without stating what are to be the consequences if it is not done. The court has dealt with the problem by devising a distinction between those requirements which are said to be 'mandatory' (or 'imperative' or 'obligatory') and those which are said to be merely 'directory' (a curious use of the word which in this context is taken as equivalent to 'permissive'). Where the requirement is mandatory, it must be strictly complied with; failure to comply invalidates everything that follows. Where it is merely directory, it should still be complied with, and there may be sanctions for disobedience; but failure to comply does not invalidate what follows.
The principles upon which this question should be decided are well established. The court must attempt to discern the legislative intention. In Liverpool Borough Bank v Turner (1861) 30 CJ Ch 379 at 380 Lord Campbell LC said:
'No universal rule can be laid down for the construction of statutes, as to whether mandatory enactments shall be considered directory only or obligatory, with an implied nullification for disobedience. It is the duty of courts of justice to try to get at the real intention of the legislature, by carefully attending to the whole scope of the statute to be construed.'
In a well-known passage of his judgment in Howard v Bodington (1877) 2 PD 203 at 211 Lord Penzance said:-
'I believe, as far as any rule is concerned, you cannot safely go further than that in each case you must look to the subject-matter; consider the importance of the provision that has been disregarded, and the relation of that provision to the general object intended to be secured by the Act; and upon a review of the case in that aspect decide whether the matter is what is called imperative or only directory.'
Where statute requires an act to be done in a particular manner, it may be possible to regard the requirement that the act be done as mandatory but the requirement that it be done in a particular manner as merely directory. In such a case the statutory requirement can be treated as substantially complied with if the act is done in a manner which is not less satisfactory having regard to the purpose of the legislature in imposing the requirement."
- Petch v Gurney directs me to consider the substance of the statutory requirement and the reasons for it. If Parliament properly regarded the requirement as one that had to be fulfilled in all cases, the court should give it that effect. The court must not substitute its own view.
- Accordingly, I turn to the substance of the requirement in paragraph 4 of the 2002 regulations. I do not accept Mr Gaunt's submission that paragraph 4 of the 2002 regulations should be construed as a directory requirement only because the information is readily ascertainable elsewhere and not negotiable as between the landlord and the tenants. Nor do I accept his submission that the requirement must be directory because it extends only to EMSs under the 1993 Act. It was part of the policy to require the relevant information to be provided to the tenant at the notice stage: it was open to Parliament to take the view that the course would save expense to the tenants (and in some cases the time of the court). Parliament was entitled to take the view that this information should be provided for the tenants at that stage even though they could (if sufficiently knowledgeable) acquire the information for themselves. Even though some tenants might know that their premises were subject to an EMS, not every tenant would do so. This is also the answer to Mr Gaunt's point that the information can be given late or provided pursuant to an order of the court pursuant to section 92 of the 1993 Act which confers power on the court on the application of a tenant to compel the landlord to comply with (among other matters) section 21(3) or the 2002 regulations. Further, it was open to Parliament to take the view that it was in practice important to provide this information only in relation to schemes under the 1993 Act, which are often schemes put in place where there is a possibility of collective enfranchisement.
- On the other hand, other arguments advanced by Mr Gaunt have greater force. The 2002 regulations clearly do not contain essential machinery: if the requirement to state whether or not the premises were in an EMS was an essential part of collective enfranchisement, the requirement would have been brought in much earlier. Furthermore, the discussion paper only refers to the requirement as "beneficial" to tenants.
- Moreover, there is undoubtedly some force in the argument that the quality of the information required by (say) section 21(3) is of a different order from that required by paragraph 4 of the 2002 regulations. I can leave aside the case where the premises are in fact subject to an EMS scheme. That is not this case. I have no difficulty in principle that a statutory requirement can be in part directory and in part mandatory. Accordingly it is no part of my reasoning that, if the requirements of paragraph 4 are mandatory where the premises are subject to an EMS, those requirements must necessarily be mandatory where the premises are not subject to an EMS. Just as section 21(6) can be directory even if section 21(3) is not, so too a single provision can be in part directory and in part mandatory. The contrary conclusion would be a triumph for form over substance in a context where substance has to be examined. Moreover, this possibility is envisaged by Millett LJ in Petch v Gurney, in the passage cited above, although he expressed no concluded view on this point.
- Paragraph 4 of the 2002 regulations contains two separate requirements which are mutually exclusive. In certain circumstances it requires a negative statement. In other circumstances it requires a positive statement. In my judgment, a mere negative statement cannot have been intended to be mandatory. There can be no possible prejudice to the tenants or their nominee purchaser if that information is excluded. On the other hand, it is possible to think of a situation where the inclusion of a negative statement could be actually misleading and thus potentially prejudicial to tenants, and that situation is where there is a scheme, similar in effect to an EMS, affecting the premises under earlier legislation, for example the Leasehold Reform Act 1967. Under paragraph 4 of the 2002 regulations, the landlord only has to state whether or not an EMS exists under section 70 of the 1993 Act. The presence of a scheme under earlier legislation may be an unusual situation, but the requirement to give a negative statement where one exists provides some support for the conclusion that the requirement to give a negative statement cannot have been intended to be mandatory with the sanction that the exclusion of the statement invalidates the landlord's counter-notice.
- Furthermore, there is no suggestion in the discussion paper that there could be any benefit to tenants in requiring a negative statement where the subject premises were not subject to an EMS. The proposal for a negative statement forms no part of the social policy set out in the discussion paper or the explanatory note attached to the 2002 regulations when submitted to Parliament. I am not prepared to assume that it had any significant purpose.
- In the circumstances, I conclude that the requirement in paragraph 4 of the 2002 regulations for a negative statement is not mandatory. The question under the Human Rights Act 1998 accordingly does not arise. That leaves the question touched on by Mr Gaunt in reply, which I have not thus far mentioned, namely whether a tenant would have any claim to compensation if the landlord failed to comply with the requirements of the 2002 regulations. It appears that, if such non-compliance occurs, he ought to discover the true position before the nominee purchaser becomes contractually bound to purchase the freehold reversion, and thus his only claim would be for wasted expenditure in preparing for the purchase of the freehold reversion. I prefer to express no view on this point as it was not fully argued and it is not necessary for my decision.
- Accordingly, I would allow the appeal.
Jacob LJ :
- I agree and would only add one point. If a tenant suffered damage (e.g. abortive transaction expenses) by reason of the landlord's failure to specify that the premises were not within an EMS, then he may well have a claim against the landlord, either in negligence or for breach of statutory duty. The case seems to fit the well-known principles laid down in Cutler v Wandsworth Stadium  AC 398. If there is liability (the point was not argued before us) it would provide an answer to Mr Radevsky's submission that to construe the provision as merely mandatory is to make it merely optional.
Ward LJ :
- I have read in draft the judgment of Arden LJ and agree with it. In a sentence, a failure to declare that there is no EMS affecting the property cannot be of such importance that the omission should render invalid a notice which in all other respects is accurate and effective. As for the prospects of successfully recovering damages for any wasted expenditure incurred as a result of such an omission, I can see the interesting arguments both ways but as the question was only raised late in the day and full argument was not directed to it, I would prefer not to express even a tentative view.
ORDER: Appeal allowed. Order as agreed by parties save the claimant to pay defendant's costs incurred in Court of Appeal and below to be subject to detailed assessment if not agreed. Permission to appeal was refused.
(Order does not form part of approved judgment)
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