17/06/2009

Rent review (Megarry at last…)

Avid students of assured tenancies will know that the late Sir Robert Megarry wondered (in his work the Rent Acts) what would happen to a term providing for a mechanism for setting the rent that was written into a fixed term assured tenancy after that tenancy had become a statutory periodic tenancy. The High Court has given us an answer in the case of London District Properties Management Limited v Goolamy [2009] EWHC 1367 (Admin).

For those who have more pressing interests than rent review, the legal background is this. Section 13 of the Housing Act 1988 creates a system by which a landlord may increase the rent of certain tenancies. Section 13 only applies to periodic tenancies and then only if the tenancy is (to paraphrase slightly):

  • a statutory periodic tenancy other than Crown or local authority tenancies as defined by paragraphs 11 and 12 of Schedule 1 to the 1988 Act
  • any other periodic tenancy which is an assured tenancy and for which there is no provision for the time being binding on the tenant which provides for a change in the rent

Thus if you let a property as an assured tenancy which is periodic from the outset and the tenancy agreement contains a valid clause which provides a mechanism for rent increases then section 13 will not apply. The mechanism you have agreed will take effect instead.

To digress slightly, this point does not seem to have been grasped by some housing associations. I have seen a great many housing association tenancy agreements which have a provision for rent review but then state that the tenant can appeal any rent to the Rent Assessment Committee. Not so. Such an agreement would oust section 13 and the RAC does not have jurisdiction to adjudicate on the rent outside s.13 (Contour Homes Ltd v Rowen [2007] EWCA Civ 842).

The puzzle is this: if a fixed term assured tenancy agreement contains a rent review clause does that clause survive in the statutory periodic tenancy? If it does survive then, it would appear, a landlord would be able to chose either to rely on the rent review clause, or serve a notice under s.13 and use that mechanism instead.

This is exactly the situation that a London Rent Assessment Committee found in Goolamy. The fixed term tenancy had included the following clause:

“6. It is hereby mutually agreed that with effect from each anniversary of the commencement of the term hereby created (whether during the said term or during the currency of any subsequent statutory periodic tenancy) the yearly rent payable hereunder (and accordingly the periodic payments of rent) shall increase by five per cent.”

After the fixed term had ended the landlord served a section 13 notice to increase the rent. The tenants referred the matter to the RAC which held that it did not have jurisdiction on the basis that:

Section 13 of the Housing Act 1988 (as amended) refers at (b) to any periodic tenancy other than one in relation to which there is a provision, for the time being binding on the tenant, under which the rent for a particular period of the tenancy will or may be greater than the rent for an earlier period.

and since the lease did contain such a provision, section 13 did not apply.

A truly puzzling decision. Section 13 does not refer to “any periodic tenancy….” but to “any other periodic tenancy…” other than a statutory one. But the tenancy in question was a statutory periodict tenancy and so (by section 13(a)) section 13 applied whether or not there was a binding provision. What on earth were the RAC doing looking at s.13(b)?

Unsurprisingly the landlords and their management company applied for a statutory review by the High Court which was granted.

The appellants argument was summarised as follows:

Mr. Buttimore, who appeared for the appellants, submits that the Panel fell into error when it suggested that this review was governed by section 13(1)(b) of the 1988 Act. It was governed by section 13(1)(a) with the result that any rent review clause in the original assured tenancy was not incorporated into the subsequent statutory periodic tenancy. That would be so whether the review clause was favourable to the tenant (as it may be here) or to the landlord. Either way, the statutory mechanism supersedes the contractual one in these circumstances. Mr Buttimore has been unable to locate any authority on the point.

The difficulty with this submission starts with the phrase  “…. with the result that” and goes on from there. That the Panel (strictly speaking it was an RAC drawn from the Panel) fell into error is evident. But the jurisdiction of the RAC is confined to that given to it by section 14 of the Housing Act 1988 which permits it, after a referral by a tenant under section 13, to determine an open market rent. An RAC does not have jurisdiction to determine what the rent payable under the tenancy might be.

What that means is that had the RAC decided that they did have jurisdiction given to them by section 13(1)(a) they would have acted beyond their powers if they had decided whether or not the rent review clause in the fixed term tenancy carried on into the statutory periodic tenancy. The High Court, on a statutory review, could not be in a better position.

This difficulty appears to have been unnoticed by the court, which agreed with the appellants. The court found a solution to the problem in section 5(3) of the act which preserves most of the terms and conditions of the original assured tenancy into the statutory periodic tenancy but “subject to the following provisions of this Part of this Act”. The provisions included section 13 and so (reasoned the court), the section 13 mechanism would prevent the rent review clause being preserved.

I’m not entirely convinced. A preserved rent review clause would work alongside and not in conflict with section 13. Section 13 does not imply a term into the a periodic tenancy, but rather provides a statutory mechanism for setting the rent. Section 5(3) does not appear (to me) to be conclusive. It is also hard to see why a landlord can grant a 1 month periodic tenancy containing a rent review clause which operates successfully, but if the same landlord granted the same tenancy as a 1 month fixed term tenancy on otherwise identical terms, section 13 would take effect.

Despite my doubts, and the fact that the decision of the court is at best obiter, I suspect that this decision will remain the law on the subject until assured tenancies as we know them are abolished.

One final remark: if a statutory periodic tenancy (other than a Crown or local government tenancy) ceases to be an assured tenancy (eg by rent review) it still remains subject to section 13, although in most cases a landlord could simply give notice if a tenant did not accept an increase in rent.

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