Could the Housing Act Trap render escalating ground rent a derogation from grant? Summing up his series on the unfairness of escalating ground rent, Rawdon Crozier proposes a way out of the dungeon (see NLJ,8 March 2019, p13
New Law Journal, 5 April 2019, LEGAL UPDATE Property, page 13 – http://www.newlawjournal.co.uk
Part 1 of this speculative article ) explained the Housing Act Trap. Part 2 explores whether the trap might render escalating ground rent a derogation from grant and thus, as a matter of law, capable of being struck down.
Derogation from grant: the principle
‘The expression “derogation from grant” conjures up images of parchment and sealing wax, of copperplate handwriting and fusty title deeds. But the principle is not based on some ancient technicality of real property … it is a principle which merely embodies in a legal maxim a rule of common honesty. It was imposed in the interests of fair dealing.’
Johnston & Sons Ltd v Holland  1 EGLR 264 at 267J
Derogation from Grant is a Rule of law
Megarry & Wade (Law of Real Property, 5th edition) described derogation from grant as a free-standing and independent rule of law, an analysis endorsed by the Court of Appeal in Johnston & Sons Ltd v Holland  1 EGLR 264.
It applies to all forms of grant and, while commonly associated with leases and other contracts relating to land, it is also encountered in contracts concerning:
- Intellectual property, eg Gloucester Place Music Ltd v Le Bon  EWHC 3091 (Ch) where the serving of notices by members of Duran Duran under the United States Copyright Act 1976 s 203 to terminate assignments to the claimant of the US copyrights in 37 songs, was held to be a derogation from the original licensing agreement.
- Shipping; although the term itself is often not used, the doctrine that an individual term must not undermine a contract’s ‘main purpose’ is identical and the link was acknowledged by Rowlatt J in M Isaacs and Sons, Limited v William Mcallum and Company, Limited  3 K.B. 377
- Franchising, eg Stone & Ashwell (t/a ‘Tyre 20’) v Fleet Mobile Tyres Limited  EWCA Civ 1209.
Derogation from grant is an exception to the general rule expressed by Lord Neuberger in Arnold v Britton  UKSC 36 that the ‘fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language’. The absence of a conflict is, perhaps, best illustrated by one of the most often cited re-statements of derogation from grant being found in Platt v London Underground  2 EGLR 121 (a judgment of Neuberger J, as he then was).
Derogation from grant may give rise to a variety of remedies according to the particular circumstances.
- An award of damages against the grantor, Platt v London Underground.
- An injunction or declaration to prevent the grantor from exercising, what would be, but for the derogation, its legal rights, Gloucester Place Music Ltd v Le Bon.
- The construction of contractual provisions so as not to undermine the main contractual purpose, William Hill (Southern) Ltd v Cabras (1986) 54 P. & C.R. 42.
- The striking down of clear contractual terms to which the parties have agreed, Glynn v Margetson & Co  A.C. 351
- Providing a defence to an otherwise well-founded claim to enforce statutory or contractual rights brought by the grantor against either the other contracting party or even a stranger to the original contract (see below).
The most striking example of the flexibility and breadth of derogation from grant is British Leyland v Armstrong Patents  AC 577,  1 All ER 850, a decision of the House of Lords falling into the last of those categories.
British Leyland brought a claim against the manufacturer of exhaust pipes, designed to fit Leyland cars. The House of Lords held that, although the copying had been indirect, it was infringement under the Copyright Act 1956. Despite this apparently well-founded claim, an injunction to assert the copyright and prevent the exhaust pipes’ manufacture was refused on the grounds that limiting car owners’ rights to repair their cars economically would be a derogation from the grant implicit in the sale of a motor car, and although a stranger to the contract of sale, the exhaust pipe manufacturer, nonetheless, had a defence by virtue of the implicit grant.
Armstrong’s effect is similar to that of Caparo Industries v Dickman  2 AC 605 (HL) in relation to the duty of care in tort, permitting the extension of derogation from grant to meet new situations, see per Lord Bridge at 627D:
‘… it seems to me within the capacity of the common law to adapt to changing social and economic conditions to counter the belated emergence of the car manufacturer’s attempt to monopolise the spare parts market in reliance on copyright in technical drawings by invoking the necessity to safeguard the position of the car owner.’
Overriding clear words in a contract
Glynn v Margetson, a shipping case, is the locus classicus: a contract in a Bill of Lading contained a deviation clause and the ship made an ostensibly permitted deviation, but the goods in question were perishable and ruined as a result. It was held that the deviation undermined the essential nature of the contract. Lord Halsbury said this: ‘Looking at the whole of the instrument, and seeing
what one must regard … as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract,’ (emphasis added).
It is axiomatic that to be engaged, derogation from grant does not require a contract to be of no benefit to one party (total failure of consideration covers that eventuality). There will always be some benefit from contracts to which derogation from grant applies: the goods in Glynn v Margetson were physically shipped and delivered, the intending passengers in Anglo Continental Holidays v Typaldos  2 Lloyd’s Rep. 61 would still have had a cruise and the purchasers of Leyland motor cars in Armstrong may have had many miles of motoring before any need to repair arose. The test is whether there has been ‘substantial’, rather than total, deprivation (see Johnston & Sons Ltd v Holland at 267M).
Platt v London Underground Ltd concerned the lease of a kiosk by the entrance to an underground station. The kiosk should have enjoyed a steady flow of passing travellers but the entrance was closed for major works. Neuberger J held that this was a derogation from grant and awarded the lessee damages. As the case concerned actions by the landlord after the grant, not all the principles he set out are directly material to a derogation arising from terms of a lease but those applicable can be summarised as follows:
- A landlord cannot take away with one hand that which he has given with the other
- It is necessary to establish the nature and extent of the grant.
- The court should ask itself which obligations on the part of the grantor, if any, can be regarded as necessarily implicit, having regard to the particular purpose of the transaction.
- There is an overlap between the obligation not to derogate from grant, the covenant for quiet enjoyment, and a normal implied term.
- An express term should, if possible, be construed so as to be consistent with ‘the irreducible minimum’ implicit in the grant.
- Not only the terms of the lease, but the surrounding circumstances at the date of the grant as known to the parties have to be taken into account.
- The circumstances as they were at the date of the grant are very important.
- In assessing what the parties to a contract actually, or must have, contemplated, the court should focus on facts known to both parties and statements and communications between them; contract is concerned with communication as well as mutuality.
Cause & effect
Is there a derogation from grant as a result of an escalating ground rent clause? Nothing conclusively defines the irreducible minimum implicit in the grant of a long lease and the question will, inevitably, be fact-sensitive in any event. Material factors may include the following:
- A long lease gives rise to a legal estate and is one of only two forms of tenure preserved as a legal interest after 1925; an Assured Shorthold Tenancy vulnerable to mandatory and discretionary grounds of possession is inherently less secure.
- A long lease and an assured tenancy cannot co-exist, Richardson v Midland Heart Ltd  L & T.R. 31; not only is relief against forfeiture inapplicable, because of ss 5, 8 & 45 of the Housing Act 1988 the mechanisms for termination are mutually exclusive; an assured tenancy can only be determined by the landlord by serving a s 8 notice: compare Richardson with the recent Court of Appeal decision in Golding v Martin  EWCA Civ 446.
- The duration of the lease—in many instances, terms of 999 years were sold.
- Whether or not a property was marketed as ‘virtually freehold’.
- The impact on value and marketability —even if technically marketable at the time of purchase through unawareness about escalator clauses, an actionable diminution in value would, prima facie, have occurred at the date the lease was entered into, Nykredit v Edward Erdman (No 2)  1 WLR 1627 (HL).
- The amount of equity in the property.
- Anything known to the developer/vendor at the time—one which had, say, had the onerous nature of the ground rent escalator drawn to its attention in 2007 (see Pt 1), might find itself in particular difficulties.
If an escalating ground rent and the consequences of the engagement of the Housing Act Trap were held to deprive a long leasehold of its essential quality and were thus a derogation from grant, a court would first be required to attempt to construe the term so as to be consistent with ‘the irreducible minimum implicit in the grant’. However, construing a clause which says ‘Pay £x’ or ‘Pay £f(x)’ (where f(x) is a formula increasing x over time) as anything other than what it says would be difficult (particularly post Arnold v Britton). Were the clause not capable of being ‘read down’, the only course would be to reject it in its entirety. The sewer could thus, potentially, afford a means of escape.
Apart from striking down offending clauses, were the argument perceived to have merit, it might put pressure on a government, which currently has set itself against retrospective legislation to aid existing leaseholders, to act to achieve a balance between the competing interests of leaseholders and freeholders by imposing a cap on escalating ground rents below the Housing Act limits, something which has just been recommended in the Report on Leasehold Reform by the Housing, Communities and Local Government Select Committee published on 18 March 2019.
The report’s annexes include a letter dated 4 March 2019 to the chair, Clive Betts MP, referencing my evidence, in which David Jenkinson of Persimmon Group, says:
‘Mr Crozier, the barrister, raises the issue properties having rents above £250 pa (£1,000 in London) being subject to the forfeiture provisions more often associated with short-term assured tenancies. We would welcome this (presumably unintended) loophole being closed by legislation for long leases. Our documentation contains an agreement by the landlord that it is not entitled to rely on the non-payment of rent ground stated in the Housing Act 1988.’
This week a group of leading housebuilders issued a ‘pledge’, trumpeted by the government, to limit ground rent increases to RPI. Acknowledging the disapplication of relief against forfeiture was unintended may prove to be a useful concession but, as RPI-linked increases will still trigger the Housing Act Trap and the provisions applicable on the termination of assured shortholds and long leases remain mutually exclusive, the government and the housebuilders seem not to have grasped the problem. Perhaps the time has come to try derogation.
Copyright NLJ & Rawdon Crozier
Rawdon Crozier is a barrister & mediator practising from KBG Chambers (www.kbgchambers.co.uk).