The Devil is in the Detail

The case has been a ‘wake-up call’ for landlords and their advisers in relation to the drafting of counter-notices under the 1993 Act.

17 Clarges Street is a substantial building in Mayfair. There was a head lease in favour of St. Anselm Development Company Limited. Each of the flat underleases included the usual service charge obligation. The “service charge” however included as a “cost” the head rent payable by St. Anselm to the freeholder – referred to as a “rent-as-service-charge-clause” or “RASC” in the judgment.

Three flats served notices claiming a statutory lease extension. The principal terms of the new lease are specified by section 56(1) of the Act; a new lease to be for a term expiring 90 years after the term date of the existing lease and at a peppercorn rent.  Accordingly, in their Section 42 notices the tenants proposed that the RASC obligation be deleted.

Counter-notices were served by the freeholder. In addition to making counter-proposals as to premium they made counter-proposals as to lease terms as follows:

“The new leases should contain such modifications and amendments as the Landlord is entitled to under and/or as may be necessary to give effect to the requirements of Chapter II of Part I of the Act and without prejudice to the generality of the above such further reasonable modifications to be agreed.”

The tenants accepted in writing unequivocally all the terms of the counter-notices. The draft lease however contained the obligation for the tenants to contribute towards the head rent. The tenants deleted this RASC clause, since its inclusion would provide for a rent otherwise than “a peppercorn”. The freeholder failed to respond to the tenants within 14 days as required by the regulations. It was the tenants’ case that the form of lease had been deemed approved. The landlord refused to complete so the tenants applied for a vesting order.

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The Court of Appeal held as follows:

The counter-notices were valid;

Agreement of terms of acquisition did not require agreement of the form of lease; agreement of something akin to commercial heads of terms would suffice;

The terms of acquisition had been agreed when the tenants accepted the proposals in the counter-notices;

Although plainly obiter, Sir Stanley Burnton held that an obligation to contribute to head-rent was a form of rent and not a service charge.

 Three important points to take away from this decision are (1) when drafting a counter-notice a landlord should be careful to draft it so that it is capable of acceptance; (2) it is possible to have arguments about the form of draft lease notwithstanding that terms of acquisition are agreed; (3) attention must be paid to the time limits contained in the regulations.