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Ground rents legislation

11 Jun 2020 / Landlord and tenant Print

Shirley not?

It’s a misconception to say that mere ‘change of use’ makes a party eligible to acquire the fee simple under the ground-rents legislation.

The Landlord and Tenant (Ground Rents) (Amendment) Act 2019 came into force by ministerial order on 17 January act was introduced as a private member’s bill and was adopted by the Government in order to remedy certain consequences following the decision of Peart J in the case of O’Gorman v Shirley.

This was a Circuit appeal by the landlord flowing from a ground-rents application before the Monaghan county registrar. Those proceedings were tied to a parallel constitutional challenge to the ground-rents legislation by the Shirley estate.

The constitutional challenge and the ground-rents appeal were heard in tandem. It was, however, accepted by Peart J that a precondition to permitting a constitutional challenge was the establishment of locus standi by the plaintiff.

This necessitated that the final outcome of the Circuit appeal be determined before the constitutional challenge could proceed.

Entitlement

Having upheld the entitlement to purchase the freehold, in the Circuit appeal, Peart J went on to hold that the legislation was not unconstitutional.

On an appeal to the Supreme Court by the landlord, the Supreme Court expressed the view that the trial judge had been wrong in his conclusions in the Circuit appeal and, hence, the plaintiff did not have locus standi to challenge the constitutionality of that legislation.

Of course, as the Supreme Court pointed out, the decision in the Circuit appeal was final, with no further avenue for appeal – the result being that the substance of the constitutional challenge was never tested at Supreme Court level.

Play your cards right

It should be noted that that position of the Supreme Court has recently been reversed, in the case of Pepper Finance Corporation (Ireland) DAC v Cannon (February 2020), in which the Supreme Court held that, under the 33rd amendment to the Constitution, the Supreme Court may, in appropriate circumstances, hear an appeal from a decision of the High Court in a Circuit appeal.

That provision was not, however, in force when Shirley was heard.

In the Circuit appeal, Peart J pointed out that, in relation to section 9(1)(b) of the 1978 act, one of the requirements at (b) is “that the buildings are not an improvement”.

‘Improvement’ was defined in section 9(2): “In subsection (1)(b) ‘improvement’ in relation to buildings means any addition to or alteration of the buildings and includes any structure which is ancillary or subsidiary to those buildings, but does not include any alteration or reconstruction of the buildings so that they lose their original identity.”

Peart J pointed out that the saver in the latter part of the definition, that excludes alteration or reconstruction, did not refer to any ‘addition’ to the buildings, as the first part of the definition had.

In other words, what was to be considered was limited to alteration or reconstruction of the original buildings, and not an addition.

Having held that, by reason of additions, the building had lost its original identity, he went on to consider whether condition 1 of section 10 was satisfied. That condition required that the permanent buildings were erected by the person who, at the time of the erection, was entitled to the lessee’s interest.

He said: “I do not take the view that it can be satisfied in the present case by establishing, or at least satisfying the court, that the works carried out to Carrick House by the tenant are of such a nature as to have caused Carrick House to have lost its original identity, and that, in that sense, the present Carrick House structure has been erected by the lessee.

“That seems to me to be straining the meaning of section 10(1) of the act. Therefore, I hold that condition 1 is not satisfied in this case.”

Generation game

Earlier in his judgment, he had concluded that the buildings had lost their original identity: “The question in my mind seems to be reduced to whether, in the light of the works carried out within the original house, and the change of use on the ground floor and the creation of rented flats on the two floors above, as well as the loss of the garden and outhouse, this property is no longer identifiable as the house that it was before 1972.

“The answer to that question, as far as I am concerned, is quite obviously that it has lost that original identity. By no stretch of anybody’s imagination could it be said that this is still the same premises as the rather attractive private residence with garden and outhouses which one can see in the photograph taken in the 1930s.

“It is, like it or not, now a commercial premises – a change to which the landlord, in effect, consented to by the removal of the restriction as to user as a private dwelling in exchange for an increased rent.

“The character of the building is so completely altered from what it was that one would be forced to conclude that its original identity has been lost, and in saying that I am closing my mind to the additional buildings, for the reason that I am of the view that they are not caught by the savour in the section.”

He further noted evidence that the area of the buildings was increased almost fivefold. Peart J went on to hold that the tenant was entitled to acquire the fee simple under the provisions of condition 2 of section 10, being the condition applicable where the rent is less than the rateable valuation.

That condition also has the provision that it must be established that the buildings were not erected by the lessor or his predecessor in title.

Peart J was severely criticised by the Supreme Court on the issue of whether it was established that the buildings were erected by the lessor or a predecessor in title of the lessor, because he had not considered the true interpretation of ‘predecessor’ in title.

Call my bluff

This was an unhappy case from many perspectives in understanding the operation of the Ground Rents Acts. Prior to this case, it had been generally accepted that works that had the effect of causing a building to lose its original identity were regarded as having been erected by the tenant.

The term ‘permanent building’ did not appear to have been considered by the superior courts in the context of section 9.

Unfortunately, the difficulty was then compounded by the decision of Peart J, on which he was supported by the Supreme Court, that the reference to ‘permanent buildings’ means “all the permanent buildings”.

Fennelly J’s rationale at paragraph 58 was that, otherwise, a tenant could easily come within the provisions of the act: “If the term ‘permanent buildings’ means that it is sufficient if the lessee has erected merely part of the buildings, however small, the right compulsorily to acquire the fee simple would be conferred.”

That decision is hard to reconcile with the effect of section 9(1)(b) and the definition in section 9(2) of the Landlord and Tenant (Ground Rents) (No 2) Act 1978, which refers to the buildings losing their original identity: “In subsection (1)(b) ‘improvement’ in relation to buildings means any addition to or alteration of the buildings and includes any structure which is ancillary or subsidiary to those buildings, but does not include any alteration or reconstruction of the buildings so that they lose their original identity.”

It surely must be the case that any alteration or reconstruction that changes the original identity of a building could not be small works, as Fennelly J suggested.

It must be conceded that the wording of section 9(1)(b) is not a model of clarity. To state that a requirement for permanent buildings to be on the land, and that such “permanent buildings are not an improvement”, begs the question ‘an improvement to what?’

Nevertheless, the sorry consequences of the Shirley litigation and the constitutional challenge are entirely unsatisfactory and, although the ground-rents legislation survives, much confusion has ensued.

Give us a clue

The 2019 act sets out to remedy some of the difficulties and inconsistencies raised by the Shirley judgments. It seeks to reinstate what was the commonly held view prior to that litigation.

The new section 9(1)(b) provides that the permanent building comprises, in whole or in part, an alteration or reconstruction, and that the alteration or reconstruction caused the buildings to lose their original identity.

The effect of that new provision is that the entitlement now clearly applies in the case where there were existing buildings, but which have been so altered as to change their original identity.

Further guidance is given in section 9(6), which sets out a number of matters that may be taken into account in considering whether the permanent buildings have lost their original identity.

These include a change in use, extent of the alteration, change in the character, and such other matters as the arbitrator may consider. It is further provided in 9(6)(b) that the fact that parts of the original building are still identifiable is not a reason to say the buildings have not lost their original identity.

It is important to recollect that the provisions of section 9(6), setting out criteria that may be considered, relate back to section 9(1)(b), which is that the permanent buildings, in whole or in part, comprise “an alteration or reconstruction”.

Therefore, while ‘the use’ of the property is now identified as a factor, it cannot, on its own, without the alteration and reconstruction of the existing buildings, be a determining factor.

Those changes are then incorporated into condition 1 of section 10: that permanent buildings, which have caused the buildings to lose their original identity, may come within the provision that they were erected by the lessee.

Condition 2 has been modified to make clear that the term ‘predecessor in title’ does not refer to a previous lessee and, further, that the rateable valuation now refers back to the old valuation lists, meaning a rateable valuation other than the latest valuation lists.

It will be seen from the foregoing that the 2019 act does not extend or enlarge the entitlements of tenants, but rather clarifies what had been a considerable judicial tangle.  

The author wishes to thank Prof John Wylie for reviewing this article.

Gavin Ralston
Gavin Ralston SC was a member of the group that advised the Minister for Justice in relation to the 2019 act