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Further Adventures in Fair Rents

By D

Compatriot Holdings Ltd Co & Anor v Chairwoman of London Rent Assessment Committee & Ors [2009] EWHC 3312 (Admin)

Following on from the post by NL in Ahmed & Ors v Murphy it has been a busy time for the High Court and the London Rent Assessment Committee (LRAC).

The appeal concerns the registration of a fair rent for two properties in Ladbroke Crescent, London. A number of other parties were involved in this appeal. C had passed its interest to Glissen Properties Ltd in December 2008 so they were added to the appeal as an interested party by order. The tenants of the two properties were also added although they made no representation and took no part in the proceedings, as was the Chairwoman of the LRAC. The LRAC was represented by the Treasury Solicitor but did not appear at the hearing although a witness statement was filed for the Vice-President of the Residential Property Tribunal Service (which RAC’s are now part of) and was considered by the Court at the hearing.

Both tenants were long-standing tenants under the Rent Act and there was no dispute as to this issue. The dispute was entirely a technical one relating to the capping mechanism introduced by the The Rent Acts (Maximum Fair Rent) Order 1999 (“the 1999 Order”).

Basically, both properties had had registered rents assessed on 1985. These remained static until a re-registration occurred in 2008. The decisions of the rent officer in relation to both properties were appealed to the LRAc who reassessed the rents, reducing them in both cases to levels below those set in 1985.

The intent and purpose of the 1999 Order was set out effectively in R v Secretary of State for the Environment, Transport and the Regions and Another, Ex Parte Spath Holme Limited which was referred to in the instant case. To quote Lord Bingham in Spath:

The 1988 Act [Housing Act 1988] had its desired effect of tempting private landlords back into the market. But it also had another effect, important for present purposes, of giving rise to rents negotiated between landlord and tenant in the market. Whereas rent officers and rent assessment committees had previously relied on other registered fair rents as the basis of comparison when setting new fair rents, there was now available a range of comparators, drawn from the market, on which they could rely (subject to making the adjustments required by statute) instead of the less factual basis of previously registered fair rents. In most areas, rent officers and rent assessment committees took advantage of this new basis of comparison in undertaking their statutory task, but in some areas (notably London and the North West) they were reluctant to do so. In these areas the gap between registered fair rents and open market rents increased, to the point where the former were at a level about half the latter, even in the absence of scarcity. In the two judgments … the Court of Appeal clearly laid down the correct approach to the assessing of fair rents, and at last even the rent officers and rent assessment committees who had previously been reluctant to do so gave effect to the basis of assessment prescribed by the 1977 Act. This had the unfortunate side-effect that tenants whose rents had previously been registered at levels well below the adjusted open market level at which they should have been set suffered very sharp and unexpected increases in the rent payable….

Following a public consultation the Government made the 1999 Order to set a cap on the increases in registered fair rents.

The Order was … made by the ministers, “in exercise of the powers conferred upon them” by section 31 of the 1985 Act. It contained a formula set out in article 2 of the Order, the effect of which is best summarised. On the first application for registration after the Order had come into effect, the permitted increase in a registered fair rent would be five per cent, if the retail price index had increased by five per cent over the two year period since the last registration, plus 7.5 per cent. Thereafter any subsequent increase over a two-year period would be five per cent plus the difference in the retail price index. The Order would only apply where there was an existing registered rent when the Order came into effect, and it would not apply where, because of repairs or improvements carried out by the landlord, the fair rent exceeded by at least fifteen per cent the previous registered rent.

It is necessary to quote the wording of Article 2(2) the 1999 Order precisely at this stage:

(2) The formula is-
MFR = LR(1 + ((x-y)/y + P)
MFR is the maximum fair rent;
LR is the amount of the existing registered rent for the dwelling-house;
x is the published index in the month immediately preceding the month in which the determination of a fair rent is made under part IV;
y is the published index for the month in which the rent was last registered under part IV before the date of the application of registration of a new rent; and
P is 0.0075 for the first application for rent registration of the dwelling-house after this Order comes into force and 0.005 for every subsequent application.

(8) For the purposes of this article:

(c) “index” means the monthly United Kingdom Index of Retail Prices (for all items) published by the Office for National Statistics.”

All would therefore seem to be well. However, it is not that simple. The Retail Prices Index (RPI) is calculated monthly by Office of National Statistics based on the value of a mixed bag of common household goods and outgoings. There are several different indices but the one that is relevant here is the so-called ‘All Items’ measure. The RPI was originally set based on the level of prices in June 1947 and increases have been measured fro that point. Therefore June 1947 was givne the base index figure of 100 and the RPI increased or decreased as prices changed from that fixed point. However, prices have increased dramatically since then (unfortunately) and so the RPI has been ‘rebased’ on several occasions, most recently in January 1987. On each ‘rebasing’ two index figures have been provided for the relevant month which allows conversion to be made from the old to the new base. The relevant figures for January 1987 were 394.5 and, of course, 100. Therefore on a rebasing a correction factor must be applied when moving accross the time in which a rebasing has occurred. The correction for figurs prior to January 1987 is thus achieved by multiplying the earlier figure by 100/394.5 or 0.2534854 so that the two figures are equated.

The LRAC did not, however, carry out this rebasing exercise. As they said in their decision:

… When considering how we should approach the application of the order, we were of the opinion that we had two options. The first option was to use the data published and therefore adopt the figure of 375.6 for May 1985. The second alternative was to interpolate the data to calculate a figure that could be adopted into the formula.
Having carefully considered the wording of the Order, it clearly states that the figure to be used in the y part of the formula should be “the published index for the month in which the rent was last registered under Part IV before the date of the application for registration of a new rent”. We consider that the Order makes no provision for us to interpolate a figure and sets out clearly that figure to be inserted into the formula is the published index, in this case 375.6. Whilst we have reservations with this approach due to the capped rent that is thereby produced, we feel this approach follows the strict interpretation of the Order.

The LRAC then fell into error. As the unrebased figure produced a rent level lower than the one set in 1985 the LRAC simply set the rent at the rebased level. This was wrong. The 1999 Order, at Article 2(4), expressly prohibits such a reduction and states that a registered rent can never be reduced below its previous level as a result of the capping exercise and if this occurs the registered rent simply remains at the current level. The figures generated by the LRAC were therefore clearly incorrect and, on any outcome, would have to be changed.

The Court then considered the rebasing issue and the interpretation of the 1999 Order by the LRAC. It found the LRAC interpretation of the Order to be incorrect on two counts:

  1. On a literal construction the 1999 Order seeks to subtract one index figure from another to calculate a relative change. Such a calculation is nonsensical if the effects of a rebasing are not considered. The difference is readily calculated. The wording of the 1999 Order is refers to index figures that have been published it follows that the Order is referring to figures calculated form a common base and the LRAC should have given effect to this intent by performing the rebasing exercise.
  2. On a purposive construction any consideration of the 1999 Order would show that the result obtained would be nonsensical if a rebasing exercise was not being carried out.

The decison of the LRAC demonstrated its misunderstanding of the 1999 Order when it referred to the need to interpolate data to calculate a figure. Such interpolation would not have been needed if the simple arithmetical exercise of rebasing had been carried out. The LRAC had misunderstood what had actually occurred during the January 1987 rebasing exercise.

The Court accordingly allowed the appeal, substituting a new, recalculated, fair rent using the calculation based on the rebasing exercise and ordered that the increased rent be backdated to the date of the decision of the LRAC.

This is an important decision. It seems from the evidence given by the Vice-President of the RPTS that a number of RACs simply do not use the rebasing formula. Given that fair rents fall far below the market level a number of landlords might feel somewhat aggrieved by this. Presumably, guidance will not be issued to all RACs and rebasing will become ingrained in the procedure.

D is a solicitor specialising in landlord and tenant matters with a London firm.


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