[2024] UKUT 335 (LC)

To re-cap: the respondent’s case is that only legal lessees can be qualifying tenants; the appellant’s case is that the term “lease” in section 75 includes both legal and equitable leases and that in all cases where there is a legal lease and an equitable lease in different hands it is the equitable lessee who is the qualifying tenant.

There is an irony here: the appellant freeholder is arguing for more tenants to have the status of qualifying tenant, whereas the respondent RTM company is arguing for a narrow interpretation of that status so that fewer tenants qualify. That is a direct result of the fact that the freeholder is seeking to take advantage of a procedural defect that affects not the freeholder itself but another party (Ms O’Connor), so that it is in the landlord’s interest to widen the class of qualifying tenant so as to increase the likelihood of a procedural defect on which it can itself rely.

Section 75(2) provides:

“a person is the qualifying tenant of a flat if he is tenant of the flat under a long lease.”

I do not agree with Mr Jacob that the natural reading of that provision is that it refers to legal not equitable leases. To a lawyer a lease may be legal or equitable. A long lease-holder is in terms of ordinary language the lessee of their flat, whether or not their lease is registered. A person who has just purchased a long lease is the owner of their flat (as indeed Ms O’Connor is said to have described herself (see paragraph 28 above)).

I do not regard the absence of an express provision, such as the one in section 37(1)(f) of the Leasehold Reform Act 1967, for the inclusion of “equitable leases” or a “tenancy in equity” as problematic in view of the presence of section 112(2), which expressly includes “an agreement for a lease or tenancy”. Such an agreement is an equitable lease, on principle going back to Walsh v Lonsdale. The idea that certain equitable leases, namely the ones that cannot readily be regarded as agreements, are excluded from the ambit of section 75(2) would make that section incomprehensible to all but the most specialist of property lawyers and would open up vast areas of sterile debate about the precise analysis of certain arrangements. And it would be impossible to understand the reason for such a distinction. Put another way, if a “lease” in section 75(2) includes an agreement for a lease or tenancy then a fortiori it must include equitable leases.

So I regard a “long lease” in section 75(2) as capable of including both legal and equitable leases. However, section 112(2) is qualified by the words “where the context permits”. And clearly the context does not permit section 75(2) to mean both, where there is both a legal and an equitable lease of the same flat, because there has to be one qualifying tenant (see section 75(5) at paragraph 6 above). In most cases, that problem does not arise: as a matter of fact in respect of most flats there is one lease, and it is a legal one.

But in some circumstances there is more than one lessee. When a long lessee has contracted to sell their flat, from the moment of exchange of contracts the purchaser falls within the words of section 112(2). And the assignment operates only in equity until after completion of the sale when the assignment is registered, so that from exchange of contracts all the way to registration of the purchase there are two lessees. Likewise if the legal lease is held on trust, express or implied, there are two candidates for qualifying tenant status. A choice has to be made. Can the appellant be right that in those circumstances the equitable lessee is the qualifying tenant?

In my judgment that is not an available construction of the statute, as a matter of plain commonsense let alone the principle of “construction against absurdity”. It would make the acquisition of the right to manage well-nigh impossible. Unregistered purchasers of flats are pretty much undiscoverable unless the legal lessee chooses to disclose their existence. So are equitable owners of flats under express or implied trusts. If the position is as the appellant argues then an RTM company must in every case as a matter of routine make a section 82 enquiry of every one of the flats, and cannot safely proceed without an answer from each of them. That is unworkable and obviously not what Parliament intended.

So where there is both a legal lease and an equitable lease (whether in the sense of an agreement for a lease, or of a granted lease that is registrable and has not yet been registered), the context does not permit that the equitable lessee is the qualifying tenant. In those circumstances the qualifying tenant is the legal lessee.

That is consistent with the analysis in 7 Sunny Gardens, where there was a legal lessee and therefore there was no need and no opportunity for the Tribunal to consider the position of an equitable owner of the lease nor to enquire whether there was one. In such a case, as the Deputy President said, “the 2002 Act is not concerned with beneficial interests”.

It is also consistent with the Supreme Court’s reasoning in A1 Properties because in the vast majority of cases (therefore “ordinarily”, as the Supreme Court put it) most of the “long leases” within section 75 will be legal leases and will be registered and easily discoverable – making the process of acquisition of the right to manage a straightforward process. In the paradigm case where all the flats in a building are let on long leases which are registered, the RTM company will be able look at the freeholder’s registered title, read the names of the lessees of each flat, and know that they are the qualifying tenants.

But what of the case where there is no legal lease, only an equitable one? That was the position in the present appeal.

In that situation either the equitable lessee is the qualifying tenant, or there is no qualifying tenant of the flat in question. The need to construe against absurdity rules out a reading of section 75 that takes the qualifying tenant to be the equitable lessee where a legal and equitable lease co-exist in different hands. But does it rule out the equitable lessee where there is no legal lessee?

I do not think it does. The fact that such leases are not visible on the Land Register is not fatal to their inclusion, because some of the legal leases within the definition in section 76 are equally hard to discover. Some are set out in section 76(2). Another is the case – not so unusual - where the qualifying tenant has died and the legal estate passes to her personal representatives despite their not being registered as proprietors (7 Sunny Gardens). Yet another is the case where a legal lease has been granted out of an unregistered estate, which takes immediate effect at law despite being initially unregistered (see paragraph 16 above). That legal lease is undiscoverable until registered, but there is no escape from the conclusion that the lessee is a qualifying tenant.

Accordingly the existence of a few cases where the legal estate is not readily discoverable does not, as things stand, either wreck the Supreme Court’s reasoning in A1 (Sunderland) (where it was said that “ordinarily”, not “invariably” there would be no difficulty in identifying qualifying tenants) or have the effect that the RTM company has to make section 82 enquiries of all leaseholders in every case. Therefore the addition of one further category of unregistered lessees, namely equitable leases where there is no legal lease, will not be inconsistent with that reasoning either.

I can think of two cases where that situation is going to arise. One is the present case where a lease is granted out of a registered freehold and has not yet been registered. The other is the (nowadays) more unusual case, mentioned above, where a legal lease has been granted out of an unregistered freehold. That lease takes effect at law, but if it is not registered within two months of completion then “the grant or creation has effect as a contract made for valuable consideration to grant or create the legal estate concerned” (section 7(2)(b) of the Land Registration Act 2002). Section 112(2) expressly retains the status of qualifying tenant for the lessee in that case, unless the context does not permit it. The context might make that inconvenient, because such an equitable lease is hard to discover, but it cannot be said that the context does not permit it because the equitable lease is no more undiscoverable than was the legal lease in the first two months after completion.

Therefore in one case where there is an equitable lease and no legal lease, the statute actually provides that the equitable lessee is the qualifying tenant.

Is there any reason therefore why a lessee whose lease was granted out of a registered estate, taking effect in equity until registered, should not be the qualifying tenant? I think not. The mischief avoided by excluding such tenants is insignificant, first because there are already and necessarily a small number of qualifying tenants who are not visible on the Land Register, and second because such tenants will in many cases be readily discoverable because they live at the property (as does Ms O’Connor) and may even be in touch with the RTM company (as Ms O’Connor was in this case). The counter-mischief (to use the language of Bennion, see paragraph 43 above) of excluding them is as Mr Bates KC describes; for some time, possibly quite a long time depending on the state of business at HM Land Registry, some or all of the lessees in a new building, whose leases are newly granted, will not be qualifying tenants when clearly they should be.

Accordingly I find that where a flat is let on an equitable lease, and there is no legal lease of the flat, the lessee is a qualifying tenant if the statutory definition of a “long lease” is met. For the avoidance of doubt I repeat: where there is both a legal and an equitable long lease, the legal lessee is the qualifying tenant.

Therefore I find that Ms O’Connor was a qualifying tenant at the relevant time in the present appeal, and therefore was a person on whom section 78 required a notice of intention to participate to be served.