Solving enfranchisement conundrums

Question

I am the owner of a head lease of a building containing six flats (none of which is let on a separate underlease). With the freeholders’ consent, I have converted the largest flat into two flats. The building works to separate the space are complete but I have not yet installed the internal partition walls to create the divisions between the rooms, nor added kitchens or bathrooms. The unexpired term of my head lease is 65 years. Can I seek statutory lease extensions of the two new flats?

Answer

No. the new flats are currently unlikely to fall within the definition of a flat within the Leasehold reform, Housing and Urban development act 1993 (the 1993 act).

Explanation

Provided that you have been the registered owner of the head lease for at least two years (and you otherwise meet the qualifying criteria), you are entitled to seek lease extensions of one or more of the individual flats within your head lease. It was established in Howard de Walden Estates Ltd v Aggio [2007] EWCA Civ 499; [2008] 2 EGLR 57, that the “tenant of a flat” (as referred to in section 39 of the 1993 Act) includes a lessee whose lease includes a flat even if the same lease also includes other flats or any other property.

In respect of the two new flats you have created, however, it remains necessary to consider whether each falls within the definition of “a flat” within section 101 of the 1993 Act. Section 101 defines flats as a separate set of premises, whether or not on the same floor, which forms part of a building and “which is constructed or adapted for use for the purposes of a dwelling”.

In Aldford House Freehold Ltd v Grosvenor (Mayfair) Estate [2018] EWHC 3430 (Ch); [2019] EGLR 55, the Court of Appeal was asked to examine the question “what is a flat”, for the purposes of the 1993 Act. In the context of a claim for collective enfranchisement, there was a dispute about whether there had been 26 or 30 residential flats in existence at the date of service of the notice commencing the claim. Historically, there had been a single flat on each of the sixth and seventh floors, but there were now two “flats” on each. None of those flats had been fitted out with kitchens, bathrooms, pipes, cables or internal walls.

The Court of Appeal found that the additional flats did not satisfy the test in section 101 because they had not yet reached a stage of construction to be suitable for use for the purposes of a dwelling.

Crucially, the definition of a flat in section 101 applies to both collective enfranchisement and lease extension claims. Therefore, without bathrooms, kitchens and internal partitions your two new flats do not currently fall within the definition of a flat within the 1993 Act, because they are not capable of being used as dwellings. However, the new flats could qualify if you complete the refurbishment so that they could be used as dwellings.

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Question

We are the freeholder of a block of 20 flats and an investor has approached us to grant it leases of the airspace and subsoil for potential future development. our surveyor told us about a recent case where the lessees of the flats acquired leases of the airspace and subsoil when they purchased the freehold of their building by way of collective enfranchisement.

Can we grant leases of the airspace and subsoil to the investor and, if so, can the lessees acquire those leases if they make a claim for collective enfranchisement in the future?

Answer

Yes, the airspace and subsoil are likely to be considered to be common parts, and the lessees would acquire the leases of those areas under a future collective enfranchisement claim.

Explanation

Certain tenants of qualifying premises containing two or more flats have a statutory right of first refusal if a landlord wishes to grant a lease of common parts of the building under the Landlord and Tenant Act 1987 (the 1987 Act). It seems that your block of flats would qualify. Therefore you would need to serve a notice on the qualifying tenants pursuant to section 5 of the 1987 Act, notifying them of your intention to grant the proposed leases; you may wish to take legal advice to confirm. On receipt of that notice, the tenants can choose to take those leases on the same terms and price as proposed and, if so, at least 50% of the qualifying tenants can serve notice of acceptance on you.

Assuming, however, that the qualifying tenants do not want to purchase the leases and once the section 5 notices have expired, you would be able to grant leases of the airspace and subsoil to the investor (on the same terms as set out in your section 5 notices).

If the lessees later sought to purchase the freehold via collective enfranchisement, it is likely they would acquire the leases of the airspace and subsoil. This was the decision reached by the Upper Tribunal (Lands Chamber) (the UT) in LM Homes Ltd and others v Queen Court Freehold Company Ltd [2018] UKUT 367. The lessees of Queen Court served an initial notice to collectively purchase the freehold and intermediate leases of the air space, basement and subsoil which the freeholder granted to a developer. There was a dispute over whether the tenants were entitled to acquire the leases. The UT determined the basement, airspace and subsoil were common parts within the meaning of the 1993 Act (the same definition as under the 1987 Act), and the lessees were entitled to acquire the leases.

This is the current law. It is subject to change as LM Homes has been appealed to the Court of Appeal, due to be heard in early March 2020.

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This article was written by Knowledge Development Lawyer Laura Bushaway at Charles Russell Speechlys and Barrister Miriam Seitler at Landmark Chambers  and appeared on 5 February 2020 in Estates Gazette. For more information please contact Laura at laura.bushaway@crsblaw.com or on +44 (0)20 7438 2261.