23 April 2019

Unjust enrichment?

Unjust enrichment?  image

Islington Council is bringing proceedings against a resident to whom it sold a two-bedroom flat under its Right to Buy scheme in 2013 for £340,000.

The Right to Buy is governed by Part 5 of the Housing Act 1985 (‘the 1985 Act’), and gives eligible tenants the right to buy the freehold or long leasehold interest in their homes. In this instance the resident, Mr Zomparelli, had rented his flat for 13 years before buying it, and his long tenancy qualified him for a discount of £102,700.

The purchase price of the property under the Right to Buy is its open market value subject to certain assumptions and disregarding certain improvements carried out by the tenant, minus the discount to which the resident is entitled. The council, when valuing Mr Zomparelli’s flat, relied on a desktop valuation which did not show that the flat was a two-bedroom property, although Mr Zomparelli has said that the second bedroom was shown on his lease. Moreover, the second bedroom is a ‘box-room’ reportedly measuring only six square metres.

The council contends that the true value of the property should have been £700,000 and it is now asking Mr Zomparelli to pay the difference or face eviction.

Undoing a property sale is not straightforward and can only be done in exceptional circumstances, for example where a false misrepresentation has been made. In this case, it appears that the council will argue that it acted ‘ultra vires’ or beyond its legal power or authority.

The council asserts that it has to bring proceedings against Mr Zomparelli as the purchase price should have been based on the flat’s open market value, and therefore it acted outside of its jurisdiction when selling it to Mr Zomparelli without taking the second bedroom into account. The council argues that its decision to sell the flat in 2013 at the lower price is void and that Mr Zomparelli has been ‘unjustly enriched’ as a consequence.

If a local authority admits the right to buy, it must state the property’s purchase price and the terms to be included in the conveyance in a section 125 notice under the 1985 Act. Section 177 of the 1985 Act allows a section 125 notice to be amended, withdrawn or reserved in the event of an error or omission. In the case of Nessa v London Borough of Tower Hamlets [2010] EWCA Civ 559 the council served four section 125 notices, arguing that it could not sell the flat at the lower purchase prices given in two of the notices as the market values given were lower than they should have been, rendering the notices ultra vires and void.

The Court of Appeal held that a power to amend could be implied to correct clerical mistakes made in a section 125 notice, but it remains unclear whether there must be a fundamental error in the notice for this power to be implied. The judgment also suggests that it may be possible for a purchase price to be amended unilaterally, and housing authorities may be comforted by the confirmation that a mistake of this nature will not cause them to be forced to sell properties at an undervalue.

As section 177’s provisions only apply where the tenant has not exercised the right to buy before the parties become aware of the mistake the judgment in the Nessa case may not assist Islington Council, but the judgement explicitly leaves open the question of whether there is any and if so what limit upon the power of a landlord to vary the price stated in its section 125 notice where the tenant has not abandoned the purchase originally proposed.

If Islington Council’s case reaches court it will be interesting to see whether it expands upon the Nessa judgment. In the meantime, it is clear that housing authorities should take care when relying upon valuations that will feed into section 125 notices.

Amy Rogers, senior associate in the property disputes team at Cripps incorporating Pemberton Greenish

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