Artificial SPVs were qualifying leasehold enfranchisement tenants

The Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) was intended to allow long term residential tenants of apartments in a building (“participating tenants”) to club together to purchase their landlord’s interest at a price determined in accordance with the 1993 Act (“collective enfranchisement”). However the 1993 Act says no “participating tenant” can hold more than 2 flats.

In Westbrook Dolphin Square Ltd v Friends Life Ltd [2014] Westbrook Dolphin Square Ltd (“Westbrook”) was the tenant of all the flats in the building under one long lease, so it created a structure to bring about a collective enfranchisement within the 1993 Act.

To do this it set up 612 new companies (“SPVs”). Each held leases of 2 flats. They all served notice on the respondent to collectively enfranchise for £111 million. No collective enfranchisement has matched or exceeded the scale of this.

WB Dolphin Square LLC (“LLC”), was owned by investors. The shares in each of the SPVs, and Westbrook were held as to 50% of the voting deferred shares by the LLC and as to the other 50% by another Jersey company, Dolphin Square Holdings Ltd (“Holdings”). LLC owned 100% of their non-voting ordinary shares. Thus the voting rights in the SPVs were held equally between LLC and Holdings with neither of them “controlling” the SPVs.

The respondent’s challenges to the Westbrook scheme fell under three categories:

1. The corporate structure.

The High Court agreed that the arrangement was a highly artificial one whose sole purpose was to qualify to pursue a collective enfranchisement claim.

Had the SPVs and LLC been “associated companies” within the meaning of the 1993 Act, all the SPV tenancies would have had to be ignored as qualifying tenancies. However the court accepted that the SPVs were not associated companies. Though they had a similar shareholding, no person held a majority of the voting rights, no person had the right to appoint directors and no person had control by agreement with others. All the voting and control rights were split equally between LLC and Holdings, because each had 50% of the voting rights. There was no agreement (or other arrangement) which gave either LLC or Holdings control. Nor was Holdings under the control of LLC because its shares were held by the trustees of a discretionary trust. Those trustees were independent and those trustees were not the nominees of anyone.

The court and Westbrook here accepted that there was no particular commercial purpose behind the scheme other than the enfranchisement purposes of getting around sections 5(5) and 5(6) of the 1993 Act which would have otherwise prevented such closely linked companies from enfranchising.

It was carefully set up to avoid any SPV having more than 2 flats, as to have let any of them have 3 or more would have prevented that SPV from being a qualifying tenant at all.

No superior corporate entity was allowed control of the SPVs but the arrangement preserved the economic benefits of the leaseholdings for the benefit of the group (in substance for LLC).

The respondent submitted that viewing the legislation purposively, Parliament had not intended the right of collective enfranchisement to be available where flat leases were granted solely for the purpose of avoiding sections 5(5) and 5(6) of the 1993 Act.

The court accepted that Parliament had targeted people (whether investors or not) who had three or more flats. But had used narrow wording eschewing anti-avoidance measures covering, for example, a person who had the beneficial interest in three flats each held by separate trustees, or an individual who owned three companies, each of which held the long lease of a flat. Wider definitions such as the definition of “associate” in the Insolvency Act 1986 would have been available to it yet Parliament had not adopted such a definition. It had stayed with the narrower wording. So the SPVs were not disqualified from being participating tenants.

As the scheme stayed the right side of the 1993 Act’s Associate Company rule it was a matter of interpretation whether the SPVs were “qualifying tenants” – and neither the structure under which the SPV was held, nor, the purpose of that structure could prevent them being such.

2. Price

The respondent said Westbrook’s Initial Notice specified an unrealistically low price and was therefore invalid. The court said that the figure of £111 million was a genuine opening offer. It was certainly not absurdly low.

3. Non – residential use

Under the Act more than 25% of the floor area of the building as a whole being put to non-residential use would have prevented a claim for collective enfranchisement.

The respondent had not in its original Counter Notice raised this challenge. It had been thought that omission would prevent the respondent from using it at court.

The court nevertheless entertained the issue but calculated that the non-residential parts of the building were within the 25% limit.

The court’s detailed investigation embraced the building’s offices, flats, company lettings, a champagne bar and restaurant and a health and fitness centre/spa. Some of the flats were only let for very short periods indeed.

Wider Implications

In most buildings, each of the flats are let on long leases so the rights to collective enfranchisement are held by all the occupying tenants. However with the expansion of privately rented accommodation more apartment blocks will be held on head leases with a multitude of shorter term tenancies similar to Westbrook beneath them. This may open the way to more head tenants, like Westbrook, being able to set up enfranchisement schemes in the future. Proposed letting structures may need to address this.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.