Collective enfranchisement, leasebacks and the preservation of development rights Image

Collective enfranchisement, leasebacks and the preservation of development rights

Posted: 15/01/2015

Recent case highlights imperative for tenants to make early claim to freehold before landlords complete building works

Mansion block tenants often have to put up with their landlords undertaking building works to the common parts to which they object. Examples of these include reducing the size of the entrance in order to enlarge or create a new apartment; using redundant storage facilities to similarly enlarge retained apartments; or attempting to create new apartments out of airspace on top of buildings.

Landlords will argue that, as these areas are within their ownership, they can do what they like “to sweat their assets” as long as the works do not represent a substantial interference with the tenants' existing rights. Tenants, on the other hand, are usually horrified by the prospect of months of building works and the loss of their amenities.

Such work is normally highly controversial and often drives leaseholders to organise a collective claim under the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act) to acquire the freehold to prevent the work.

In such circumstances, can a landlord retain the potential development rights by taking leasebacks of those areas in the building? Such rights are given to the landlord under Section 36 and Schedule 9 of the 1993 Act. If granted, then the landlord will receive a new lease for 999 years at a peppercorn rent.

This was the situation faced by the tenants in the recent case of Merie Bin Mahfouz Company (UK) Limited v Barrie House (Freehold) Limited [2014] UKUT390. The Upper Chamber (Lands Tribunal) gave a decision on this just before Christmas.

Merie Bin Mahfouz Company (UK) Limited v Barrie House (Freehold) Limited [2014] UKUT390 case report

The building is located opposite Kensington Gardens and consists of 11 floors with a basement and, at the time of the claim, 37 flats.

In 2010, the landlord started work to extend the porter’s flat by incorporating part of an adjacent tank room. This was followed in 2011 by work to form a new flat (Flat 1A) in the entrance hall of the building. The landlord also started work in the basement to create an office out of a storage area formerly used by the porters and residents.

The landlord later applied for consent to build two new flats on the roof of the building. That application was turned down but the landlord indicated he would appeal. The roof already had leases granted to Orange and O2 for telecommunications equipment.

Claim to acquire freehold

Not surprisingly, given these intended works, the tenants launched a collective claim to acquire the freehold. The landlord continued with its works and responded with a counter-notice seeking leasebacks to various parts of the building including the new flat being created, the porter’s flat, the basement office and the roof space.

Under the 1993 Act, a landlord can require leasebacks on a mandatory or discretionary basis. In this instance, only the latter basis would apply as long as what is proposed as the subject of a leaseback is either an apartment not already the subject of a qualifying tenant or is a unit or premises occupied for business purposes.

The request for a discretionary leaseback must be made at the time of the landlord's counter-notice. It is invalid if the request is made afterwards. This was decided by the Court of Appeal in the case of Cawthorne and Others v Hamdan [2007] Ch187.

The date when this is tested is the date when the collective claim is served on the landlord and not when the matter is eventually determined by the tribunal.

Tribunal decision

In this case, it was found as a fact by the First Tier Tribunal that neither the new apartment nor the office accommodation in the basement was finished when the claim was served. As a result, the landlord was not entitled to seek a leaseback as the apartment/unit which is the subject of the leaseback has to be in existence and completed at the time the claim was made. This decision was upheld by the Upper Tribunal.

Interestingly, the Upper Tribunal thought that it would still be possible for a landlord to insist upon a leaseback of an apartment if it was formerly part of the common parts of the building but only if the works to incorporate that area had been completed and its creation had not substantially interfered with the tenant's existing rights.

One of the other arguments the tenants tried to use to defeat the landlord's claim for a leaseback of the ground floor apartment was that it cut through their fire escape route. The existence of a fire escape route is often encountered in practice but the Upper Tribunal said that, because the tenants did not have an express right granted in their leases, there was no legal easement, only a revocable licence. This allowed the landlord to divert the route of the fire escape.

The request for a leaseback of the porter’s flat was also given short shrift as the Lower Tribunal was bound by the earlier Court of Appeal's decision of Panagopoulos v Earl Cadogan [2011] Ch.177. The Upper Tribunal agreed saying that the porter’s flat was part of the common parts and therefore part of the area being claimed in the collective claim.

However, in relation to the roof top area occupied by O2 and Orange, the landlord was successful in claiming a leaseback, even though it was acknowledged to be a common part. Essentially, the roof top area had ceased to be a common part because leases had been granted to O2 and Orange.

Implications of tribunal decision

Perhaps it is this part of the decision that is most surprising and gives rise to some difficult practical issues over the repair of the roof which will need to be overcome.

In addition, because the two telecommunications companies each had separate facilities in part of the basement, the Upper Tribunal held that the leaseback could include those areas as well as they were being used for business use. There is no requirement to have these areas contiguous with the roof top. They simply have to be within the curtilage of the building.

The eventual leaseback of the roof will have to restrict the use to business use but, under Schedule 9, an alternative use can be sought, subject to obtaining the landlord's consent - which may not to be unreasonably withheld. As a result, the landlords may yet be able to redevelop the roof once they obtain planning permission and vacant possession.

The case neatly illustrates the complexities which arise on collective claims and the need to be alert to any potential traps. The landlord thought it was being clever to get on and complete its redevelopment even though a claim had been made. Clearly that gamble did not pay off. It also shows the need for tenants to organise themselves quickly and serve as soon as they can, well before completion of the landlord's works. Had the works been completed, the outcome would have been very different.

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