Category Archives: Leasehold enfranchisement

Payment of lease extension completion statement did not oust LVT’s judgement on costs

By section 60 of Leasehold Reform Housing Urban Development Act 1993 (the 1993 Act) it is the enfranchising residential tenant who must pay the costs of the extension lease. Where those costs are in dispute there is a mechanism for completion to take place without resolution of that dispute. This is provided by section 56(3) of the 1993 Act.

Whether the Leasehold Valuation Tribunal (LVT) has jurisdiction depends, to some extent, on section 91(1) of the 1993 Act. It says the LVT only has jurisdiction “in default of agreement” as to the amount of costs recoverable under section 60.

In the Upper Tribunal (Lands Chamber) case of Friends Life Ltd & Anor v Jones [2014] the central issue was whether a binding agreement as to the amount of the solicitors’ conveyancing fees occurred, or was made, when the residential tenant’s solicitor paid, without demur, the completion monies requested by the intermediate and head landlords, at completion of the extension lease, on 22 March 2013.

The Tribunal determined that there was no agreement as to costs because by its surveyor the residential tenant had five weeks earlier issued an application in the LVT under section 92(1)(d) of the 1993 Act seeking determination of the reasonable costs payable and, a week prior to the completion of the extension lease, the LVT had issued directions without hearing requiring the intermediate and head landlords to send a detailed statement of the costs which they sought under section 60(1) of the 1993 Act.

Seen in that context, the payment of the completion monies could not amount to an unequivocal acceptance of the 22 March 2013 cost figure. Rather, the payment of the full completion fees accorded with section 56(3) of the 1993 Act, which requires that where the amount of costs is not agreed the tenant cannot require completion of the extension lease without tendering the amount “so far as ascertained” of the costs for which the tenant is liable under section 60. Here the amount of the costs was “ascertained”, and full payment had been tendered and made, even if the amount of the costs had not been “agreed” because any costs in excess of £722 plus disbursements and VAT were disputed as was clear from the residential tenant’s surveyor’s section 92(1)(d) application.

In short, the payment of the costs on 22 March 2013 was merely the provision of full “security” so as to enable completion of the extension lease to take place pending the outcome of the residential tenant’s surveyor’s section 92(1)(d) application to the LVT. The fact that the tenant was acting by two representatives, or agents, did not affect that conclusion. Their separate acts were to be treated as the joint acts of the principal i.e. the residential tenant.

So the LVT had jurisdiction to decide the cost issue. That jurisdiction had not been ousted by any “agreement” as to the amount of costs recoverable under section 60.

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

Information omitted from Collective Enfranchisement notice was fatal to it

Where a notice is served under section 13 of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”), claiming the right to acquire the freehold of a residential block, using the collective enfranchisement provisions of the 1993 Act, the information on the Section 13 notice is intended to include and disclose:

– the number of qualifying tenants in the premises (section 3(1)(b)),
– whether the total number of flats held by the qualifying tenants is not less than two-thirds of the total number of flats in the premises (section 3(1)(c)) and:
– whether the section 13 notice has been given by qualifying tenants of not less than half of the number of flats contained in the premises (section 13(2)(b)).

In the Court of Appeal case of Natt & Anor v Osman & Anor [2014] the Section 13 notice failed to comply with section 13(3)(e) of the 1993 Act because it did not give:

– the names of one of the qualifying tenants in the building,
– the address of the flat of that qualifying tenant, and,
– the particulars of that qualifying tenant’s lease as specified in section 13(3)(e)(i).

The Court of Appeal said that for the reasons in the preamble to this blog the omitted information was fundamental to the collective enfrancisement process.

Furthermore:

1. Paragraph 15 of schedule 3 to the 1993 Act had specifically said which inaccuracies in Section 13 notices would not invalidate them and the circumstances in which they could be amended, and,

2. Since the Landlord challenged the validity of the original Section 13 notice, there would have been nothing to prevent the immediate service of a fresh Section 13 notice “without prejudice” to the tenants’ contention that the original notice was valid. Section 13(9)’s restriction on the service of a new Section 13 notice within 12 months after the withdrawal or deemed withdrawal of a Section 13 notice only applies if the original notice was valid.

The invalidity of the notice was upheld and the applicant’s appeal was dismissed.

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

Enfranchising freeholder could circumvent dispute over leasebacks

Where you have a collective enfranchisement under Chapter I, Part I of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”), and a nominee purchaser, is to acquire the freehold under those collective enfranchisement provisions it may be that the Leasehold Valuation Tribunal (“LVT”) awards the freeholder the right to a leaseback of some of the flats.

What if the freeholder is dissatisfied with the leaseback terms and the price determined by the LVT? Can the freeholder grant third parties long leases of the flats concerned on terms more favourable to it than those which it had previously proposed, but which had already been rejected by the LVT in the alternative terms they awarded? Can a freeholder circumvent a determination by the LVT as to the terms of a leaseback in this way?

From the nominee purchaser’s perspective whatever the freeholder transacts, in exercising that freedom to deal with what temporarily remains it’s own property, will be mitigated by it’s being reflected in the price paid for the freehold by the nominee purchaser and if that necessitates an adjustment to the figure already quantified by the tribunal the price adjustment need not cause significant delay.

Any wasted expenditure, may be considerable but that may be a risk which the nominee purchaser and the participating tenants must take to obtain the freehold.

In the Upper Tribunal (Lands Chamber) case of Queensbridge Investment Ltd v 61 Queens Gate Freehold Ltd [2014] the Appellant freeholder said the effect of Section 36 and paragraph 5 of Schedule 9 to the 1993 Act was that it was under no obligation to enter into leasebacks on the terms the LVT had awarded.

The Appellant had been entitled to grant 3 new flat leases (“the New Leases”) to third parties on it’s own terms whilst the enfranchisement claim progressed.

Agreeing with the Appellant the Upper Tribunal said the only basis on which the Respondent nominee purchaser could insist on the grant of leasebacks would be either if there had been a contract between the parties for a grant of leasebacks on the terms determined by the LVT, or if the Appellant had been estopped from using the freedom allowed by the 1993 Act to grant New Leases until immediately before the Respondent acquired the freehold. That grant was not prohibited by the elaborate anti-avoidance provision designed for the protection of tenants exercising the enfranchisement rights in section 19 of the 1993 Act.

There was clearly no enforceable contract for the grant of leasebacks. There was no document satisfying section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.

The counter-notice’s inclusion of a statement that the Appellant accepted the participating tenants’ proposals for mandatory leasebacks of flats A and 8 and additionally required a leaseback of flat 9 did not commit the Appellant to leasebacks on whatever terms were determined by the LVT and whether or not the conditions in paragraphs 2(1) and 5(1) of Schedule 9 were satisfied immediately before the freehold purchase was completed.

The 1993 Act did not create a statutory contract binding the parties to proceed on the terms agreed or determined by the relevant tribunal. The nominee purchaser could withdraw from the purchase at any time until it was completed.

The only time at which it could be known whether a leaseback was to be granted was “immediately before the appropriate time” i.e. immediately before the freehold is acquired by the nominee purchaser (see paragraphs 2(1) and 5(1) of Schedule 9 of the 1993 Act). In the meantime, the freeholder could continue to grant new leases while the enfranchisement claim progressed so long as the anti-avoidance provisions in section 19 of the 1993 Act were not infringed.

It was “immediately before the appropriate time” that the “condition subsequent” must exist which determined the freeholder’s entitlement to a leaseback.

If, at that time, a flat was let to a qualifying tenant, the freeholder had no obligation to take a leaseback under Part II of Schedule 9 and no entitlement to do so under Part III. Nor would there be any obligation on the nominee purchaser to grant such a leaseback.

Section 6(1), which imposed that obligation, applied only in respect of leases which are required to be granted by virtue of Parts II and III of Schedule 9.

As regards elective leasebacks under Part III of Schedule 9 of the 1993 Act, whether or not a flat was occupied by a qualifying tenant at the appropriate time, a freeholder retained the right to decline to accept a leaseback at all if it was unhappy with the terms offered by the tribunal.

The fact that registration of the New Leases at the Land Registry had not been completed did not mean that the New Leases were not tenancies for the purpose of the 1993 Act. In Part I of the 1993 Act “lease” and “tenancy” have the same meaning and include (where the context permits) an agreement for a lease (see section 101(2)). An executed lease, awaiting registration, is an agreement for a lease, and the lessee under that lease was not disqualified from being a qualifying tenant by section 27 of the Land Registration Act 2002.

It follows that any dispute over the terms of a leaseback is therefore conducted against the background that the freeholder may circumvent the dispute which may render the dispute redundant and the costs incurred wasted.

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

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.