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Leasehold enfranchisement: A freeholder’s entitlement to leasebacks of areas within the Premises

12 December 2014

The Upper Tribunal has given its long awaited decision in December in the case of Merie Bin Mahfouz Company (UK) Ltd v Barrie House (Freehold) Ltd, in which Charles Russell Speechlys acted on behalf of the Nominee Purchaser, Barrie House (Freehold) Ltd.

The appeal and cross appeal were brought against two decisions of the Leasehold Valuation Tribunal (LVT) dated 23 February 2012 and 9 April 2013 following a claim to acquire the freehold made by an Initial Notice given on 12 January 2011 in respect of the property known as Barrie House, 93-94 Lancaster Gate, London W2 3QJ.

The Leasehold Reform, Housing and Urban Development Act 1993 provides for a Reversioner to formally respond to a claim to acquire the freehold of premises by giving a Counter Notice under section 21 of the Act specifying “any additional leaseback proposals by the reversioner”.

Here, the freeholder responded by way of Counter Notice on 10 March 2011, claiming leasebacks of various areas in the building. The Nominee Purchaser disputed the freeholder’s entitlement to leasebacks of certain of the areas as claimed.

The issues

The decision of the Upper Tribunal in the appeal deals principally with the freeholder’s entitlement to leasebacks of certain parts of the building where the “Units” in respect of which leasebacks were being claimed were not in existence at the “Relevant Date” (being the date on which the Initial Notice was served) and which included common parts at the Relevant Date.

By way of a cross appeal, the Nominee Purchaser contested the LVT’s decision that the freeholder was entitled to leasebacks of commercial premises let on business leases to O2 and Orange.

The freeholder contended that it should be open to a freeholder to claim a leaseback of any area within the building provided that the relevant area had become a Unit (within the meaning of the 1993 Act) by the completion of the claim.

The Nominee Purchaser argued that a freeholder’s right to a leaseback of a Unit is not a right to a leaseback of any random area out of which a freeholder may choose to create a Unit between the date on which an Initial Notice is served and the date of completion of the enfranchisement claim. A Unit must exist on the Relevant Date.

Disputed Leasebacks

In this appeal, there were three Units in relation to which leasebacks were being claimed by the freeholder and disputed by the Nominee Purchaser – Flat 1A, a basement office and the porter’s flat.

Flat 1A

Flat 1A was constructed by the freeholder partly in the lobby of the building, taking over the area occupied by a porters’ desk, a common room area used by residents and visitors, and an area which formerly comprised maids rooms.

It was common ground in this case that the Unit was not created until after the Relevant Date. Works of construction for Flat 1A had not started before the Nominee Purchaser gave its Initial Notice and the works were not completed until after service of the Counter Notice.

Flat 1A was constructed within an area which included common parts of the building, and over which flat tenants had rights of access. The Upper Tribunal considered whether a Unit which includes an area that was a common part at the Relevant Date could be the subject of a valid claim for a leaseback.

The Upper Tribunal upheld the decision of the LVT in that a freeholder is not entitled to a leaseback of a Unit which was or was included within an area that was a common part at the Relevant Date, and upheld the LVT’s Decision that in order to be the subject of a valid claim for a leaseback, a Unit must exist as a Unit in which a leasehold interest can properly be created at the time when the Initial Notice is served.

The freeholder’s claim to a leaseback of Flat 1A failed.

Basement Office

The basement office (another Unit in respect of which the freeholder was seeking a leaseback) did not exist at the Relevant Date. The building works to create the basement office did not start until after service of the Counter Notice by the freeholder. Furthermore the area in which the basement office was created was part of the common parts of the building.

The Nominee Purchaser contended that on the basis that the Unit did not exist at the Relevant Date and that it comprised common parts, the freeholder should not be entitled to a leaseback of the Unit. 

The Upper Tribunal upheld the LVT’s decision to refuse the freeholder a leaseback of the basement office. The freeholder’s claim to a leaseback of the basement office failed.

Porter’s flat

The freeholder sought a leaseback of the porter’s flat, which the Nominee Purchaser opposed on the basis that following the decision of Roth J in the case of Panagopoulos v Cadogan [2010] EWHC 422 (Ch) a porter’s flat was a common part and that therefore the freeholder should not be entitled to a leaseback of that Unit.

The Upper Tribunal held that the LVT was right to refuse the freeholder a leaseback of the porter’s flat, and the freeholder’s appeal on this point failed.

The rights of lessees under the 1993 Act is to acquire the freehold of their building which contains their flats, including the common parts.

The rights of acquisition are protected by section 19 which prevents a landlord from making disposals severing its interest in the property and from granting new leases where the relevant lease would have been subject to the leaseholders’ rights of acquisition if it had been granted before the Initial Notice was given.

It would be contrary to the scheme of the Act to allow a freeholder to defeat the entitlement of the tenants to acquire the freehold of the common parts by getting leasebacks of them.

Telecommunications equipment/aerials

The freeholder claimed leasebacks of telecommunications equipment let on business leases to O2 and Orange, each comprising equipment located in the basement of the building together with equipment/aerials on the roof, including the airspace above such areas.

The Nominee Purchaser contended that the O2 and Orange premises could not be said to be a separate set of premises capable of being leased back, but rather an amalgam of premises in separate parts of the building and a lump of airspace above the roof of the building.

The Upper Tribunal found that although the aerials went into the airspace above the roof, it did not put the Units outside the concept of those “contained in” the building.

The Upper Tribunal also found that the airspace occupied by the aerials was “appurtenant” to the equipment located in the basement and that it would be possible to grant leasebacks (including that airspace) as appurtenances to those parts of the building.

This decision of the Upper Tribunal provides some welcome clarity in relation to what areas of a building may be susceptible to leaseback claims by freeholders when faced with a collective enfranchisement claim.

For more information please contact David Haines, Partner, or Natalie Deuchar, Associate

T: +44 (0)845 359 0026

david.haines@crsblaw.com

T: +44 (0)1483 25 2504

natalie.deuchar@crsblaw.com