R v Secretary of State for the Environment, Transport and the Regions and Another, ex parte. Spath Holme Ltd

On 11 and 8 January 1999 the Secretary of State for the Environment, Transport and the Regions and the Secretary of State for Wales (to whom I shall together refer as "the ministers") made The Rent Acts (Maximum Fair Rent) Order 1999 (S.I. 6/1999) ("the Order"), which applied to England and Wales. They did so in the exercise of powers expressed to be conferred on them by section 31 of the Landlord and Tenant Act 1985. Spath Holme Limited, a landlord, sought to challenge the Order, contending (among other things) that section 31 of the 1985 Act did not give the ministers power to make it. Permission to apply for judicial review was refused by the single judge, but granted by the Court of Appeal which, at a further hearing, accepted Spath Holme's contention and quashed the Order. The main question in this appeal to the House is whether the Court of Appeal was right to hold that section 31 gave the ministers no power to make the Order.

The Facts

In paragraphs 3 - 13 of its judgment ( [2000]) 3 WLR 141) the Court of Appeal has helpfully summarised the facts in clear and uncontentious terms. A further account of the statutory history and certain decisions of the courts is given by the Court of Appeal in Curtis v. London Rent Assessment Committee [1999] QB 92. I give here a brief account of the context in which the present problem arises.

During the last century England and Wales suffered from a persistent shortage of housing. The demand, in particular for private rented accommodation, was greater than the supply. This enabled some private landlords to exploit the scarcity of what they had to let by exacting exorbitant rents and letting on terms disadvantageous to the tenant. A series of statutes, beginning in 1915, sought to address this problem, by controlling the rents which could be charged and affording security of tenure to tenants. This control, beneficial though it was in many ways, tended by its very effectiveness to exacerbate the problem: the financial return to the landlord was at times so modest that there was very little incentive to let accommodation to private tenants, with the result that the supply of accommodation available for private letting tended to shrink. Thus statutes were passed with the object of giving landlords a return sufficient to induce them to make accommodation available.

The Rent Act 1965 was intended to revitalise the market in privately rented accommodation by introducing a new regime of what were called fair rents. These provisions were consolidated in the Rent Act 1968, extended in the Rent Act 1974 and consolidated in the Rent Act 1977, which remains in force. Section 70 of that Act governs the assessment of fair rents, which are to be open market rents adjusted to discount for scarcity and to disregard certain matters specified in section 70(3). While the statute does not in terms refer to open market rents, that has been held by the Court of Appeal to be the proper starting point in the process of assessing and registering a fair rent under the 1977 Act: see Spath Holme Ltd. v. Chairman of the Greater Manchester and Lancashire Rent Assessment Committee (1995) 28 HLR 107z; Curtis v. London Rent Assessment Committee, above.

In giving effect to this statutory regime, rent officers and rent assessment committees faced the practical difficulty that there was no open market in unregulated privately-rented property with which comparison could be made. The years following 1965 were also years of very high inflation. The result was that rents set by rent officers and rent assessment committees did not keep up with inflation, to the benefit of tenants but to the obvious disadvantage of landlords. So the problem which Parliament had sought to address in 1965 once more became acute, and the market in privately-rented accommodation declined. By the Housing Act 1988 it was again sought to stimulate a free market in such accommodation by providing for assured and assured shorthold tenancies, which (subject to a limited safeguard for some tenants) provided for rents to be negotiated and agreed between landlord and tenant. Regulated tenancies under the Rent Act 1977 continued to exist, but no new regulated tenancies were to come into existence.

The 1988 Act 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 already mentioned 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.

The Minister for London and Construction made a statement on this subject in the House of Commons in January 1998, expressing the government's concern about the disproportionate increases which some regulated tenants had suffered, and a consultation paper was issued in May 1998 outlining the options which had been identified and the action which the government provisionally favoured. The options were: to do nothing and allow rent officers to continue to set fair rents in accordance with section 70 of the 1977 Act; to provide for a phasing of the rent increases over a period of 2 to 3 years; or to apply a maximum limit linked to the retail price index to increases in rents which had already been registered, but excluding lettings where a substantial increase in rent was attributable to repairs or improvements carried out by the landlord. The consultation paper made plain the government's provisional preference for the third of these options, which would be given effect by exercising the reserve power in section 31 of the Landlord and Tenant Act 1985.

Not surprisingly, tenants and tenants' associations supported the third option, while seeking a maximum percentage increase smaller than the government had proposed. Landlords and their associations favoured the first, or failing that the second, option. They opposed the third. This was understandable: since the cap was not to apply to rents registered for the first time, the third option if adopted would have the consequence that landlords who had previously been receiving a registered rent lower than it should have been if the rent had been assessed on the correct basis, and who had thereby been subsidising their tenants, were liable to suffer further loss through denial of the full increase to which adoption of the correct, adjusted market value, basis of assessment would have entitled them.

Following public consultation, the government adopted the third option, subject to a reduction in the maximum percentage increase as sought by tenants. The Order was accordingly 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. Article 3 of the Order and the Schedule provided that The Rent Act 1977 should be modified by inserting a new paragraph into Schedule 11 of the 1977 Act. That is the Schedule which governs applications for the assessment and registration of fair rents by rent officers and rent assessment committees. The new paragraph provides:

"(a) the rent officer, in considering what rent ought to be registered, shall consider whether that article [article 2] applies; and

(b) where a matter is referred to them, the committee shall consider whether that article applies and, where it does apply, they shall not, subject to paragraph (5) of that article, confirm or determine a rent for the dwelling-house that exceeds the maximum fair rent calculated in...