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Property Law - Leasehold Enfranchisement

By : Robert Leonard

On 15th December 2004 the Court of Appeal considered the nature of the requirement for a landlord to include in his counter-notice under the Leasehold Reform, Housing and Urban Development Act 1993 a statement indicating whether the premises were within an estate management scheme ("EMS"). The Court concluded the requirement was, where there was no such scheme, directory and not mandatory.

In 7 Strathray Gardens Ltd v Pointstar Shipping & Finance Ltd [2004] EWCA Civ 1669 a number of tenants had served a notice of collective enfranchisement under the 1993 Act. The landlord's counternotice contained the information required by s. 21 of the Act but omitted to state whether the premises were within an EMS. In fact they were not. The requirement to state whether the premises were within such a scheme was added by the Leasehold Reform (Collective Enfranchisement) (Counter-notices) (England) Regulations 2002 pursuant to the power given to the Secretary of State by s. 99 (6) of the Act. It provided: "A counter-notice given under s. 21 … 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 s. 70".

The requirements of s. 21 are mandatory. Failure to comply leads to very unpleasant consequences for the landlord. If he does not oppose the collective enfranchisement but takes issue with the proposals, (most importantly, the price proposed) he needs to comply with the requirements. Failure to do so will prevent him challenging the price at the LVT, unless the price proposed is so low as not to amount to a genuine proposal, which will invalidate the tenants' notice - Cadogan v Morris [1999] 1 EGLR 59.

Whether the consequences of failure to comply with the requirement of the Regulations had a similar effect was therefore critical to the landlords' wish to take issue with the tenants' proposed price of £117,000. They were not in a position to say that it was so low as not to amount to a genuine offer.

Arden LJ held: first that notwithstanding its wording the requirement of the Regulations was self-standing and did not become part of the s. 21 requirement, with the consequence that it did not for that reason fall within Cadogan. Second that although "shall" was capable of being a mandatory word, the question of whether it was mandatory or directory in these circumstances depended on the substance of the requirement, which had to be construed in the context of the statutory scheme. In the present case it was directory only because if the need to state whether the premises were in an EMS was an essential part of collective enfranchisement the requirement would have been brought in much earlier; the quality of the information required by s. 21 was of a different order; a requirement such as this could be in part directory and in part mandatory and if directory in the present case (where there was no EMS) might well be mandatory where there was such a scheme; there was no possible prejudice to the tenants in the omission and no benefit to them in requiring a negative statement.

It would seem to follow that the omission of this requirement where the premises are in fact the subject of an EMS is likely to be fatal to the landlord's wish to contest the price of other matters relating to the tenants' proposals - save in the rare case of a gross undervalue proposed.