Give me my leases back...
The concept of being forced to sell your freehold against your will offends many people’s sense of fairness. The Leasehold Reform, Housing and Urban Development Act 1993 is essentially a form of compulsory purchase, where groups of tenants can force a sale of the freehold by their landlord. However, the 1993 Act contains provisions which are intended to address potential injustices which may be faced by a freeholder whose property is the subject of a collective freehold acquisition claim.
The most obvious is the requirement for the tenants acquiring the freehold to pay a fair market price – whilst the 1993 Act provides a detailed mechanism for calculating the price to be paid, the purchase price is still frequently one of the main reasons for a dispute between the parties.
A freeholder’s right to be granted leases back of certain flats or units within the building upon completion of the acquisition, for example, so it does not lose an income stream from a commercial unit, has been the subject of recent interest.
There are two types of leaseback claims possible under the 1993 Act – mandatory leasebacks and optional leasebacks (where the onus is on the freeholder to make its request for the leaseback in the Counter Notice).
As far as mandatory leasebacks are concerned, the position is clear – if a flat is let under a secure tenancy or by a Housing Association, then the freeholder must be granted a leaseback of the flat.
The position is less clear in the case of optional leasebacks where the freeholder may have an option to claim a leaseback of a flat or other parts of the building.
Optional leasebacks apply in two situations:
1. Where a unit is not immediately before the appropriate time let to a qualifying tenant; and
2. Where the freeholder is living in the building (provided certain criteria are met).
The criteria that the unit is not immediately before the appropriate time let to a qualifying tenant has given rise to recent judicial debate.
In the case of Cawthorne v Hamdan, the Court of Appeal decided that where a flat was not let to a qualifying tenant at the time of the service of the Counter Notice, the request for a leaseback must be contained in the Counter Notice. If not, then the freeholder could not seek a leaseback of that unit.
Further, even if the request was properly made for a leaseback in the Counter Notice, the flat had to continue not to be let to a qualifying tenant until completion for the freeholder to be entitled to a leaseback.
The issue left open by the Court of Appeal is what would happen in the situation where a flat was let to a qualifying tenant at the time of service of a Counter Notice, but ceases to be so immediately before the appropriate time.
The case of Merie Bin Mahfouz Co (UK) Ltd v Barrie House (Freehold) Limited came before the Upper Tribunal in 2014 (Charles Russell Speechlys represented Barrie House (Freehold) Limited, the nominee purchaser). In this case, the freeholder had included in its Counter Notice numerous leaseback proposals for flats and other parts of the building (including the porter’s flat, the roof, a basement office and an area in the building in which it was to build a new flat).
The freeholder constructed two units (an additional flat and a basement office) in the common parts of the building, which it was argued did not exist as “units” as defined under the 1993 Act at the time when either the Initial Notice or the Counter Notice were served.
The Upper Tribunal held, upholding the decision of the LVT (as it then was) that in order for a leaseback claim to succeed, the units had to have physically existed as units in which a leasehold interest could properly be created at the time that the Initial Notice was served.
The decision before the Upper Tribunal had the subject of an appeal by the freeholder to the Court of Appeal, but the acquisition of the freehold in this case completed in October 2016. The Upper Tribunal’s decision that the units had to have physically existed as units in which a leasehold interest could properly be created at the time that the Initial Notice was served will not therefore be the subject of a challenge at this time before the Court of Appeal
The legislation on enfranchisement is complex. Whilst the recent decisions on leasebacks have provided welcome clarity in relation to the areas of a building which may be the subject of successful claims by freeholders for a leaseback, and when the claim to a leaseback must be made, some uncertainty still remains. Tenants still may not end up acquiring as much of the building as they expected.
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