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Following on from the ALEP Conference at the IET Savoy Place a copy of the speaker's notes has been posted to this site and appears below.

Mark Chick

20.10.2011

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‘Take No Notice !’

ALEP Conference 18^th October 2011

Speaker’s Notes: Mark Chick

A.        Do the Ground Work:

1.         Premises to which the Act applies and Qualifying Tenants

1.1           The first considerations are whether the building is one to which the Act[1] applies and whether there are sufficient qualifying tenants to bring a claim to the freehold.

1.2           At least two thirds of the building must be let out on long leases (Section 3). 

1.3           If any flat owners own three or more flats then they will be excluded from counting in the number of qualifying tenants (Section 5 (5)).  Also be aware that if there are only two flats in the building then both must participate in order to be able to enfranchise the building.

1.4           If there is a “resident landlord” the building may well also be exempt from the provisions of the enfranchisement legislation. 

1.5           Section 10 provides that where a building is not part of a purpose built block and the same person has owned the freehold since conversion into two or more flats and that they or an adult member of their family resided in these as their only or principal home in the period of 12 months leading to the tenant’s exercise of the right to enfranchise then this exemption will apply and the block will not be enfranchiseable[2].

1.6           Also consider whether the building itself has a “split reversion”.  It is possible to enfranchise in such a situation, but this was not always the case.  There are rules set out in Schedule 1 to the 1993 Act.  See also the amendments to Section 9(2A) inserted by the Housing Act 1996.

2.         What constitutes a ‘Building’? 

2.1           A building must be a “self-contained building” or part of a building.  The applicable test is set out in section 3(2).

2.2           A building is ‘self-contained’ if:-

2.2.1      It constitutes a vertical division of the building and the structure of the building is such that it could be redeveloped independently of the remainder of the building; and

2.2.2      The relevant services provided for occupiers of that part are provided independently of the relevant services provided to the occupiers of the remainder of the building, or could be so provided without involving the carrying out of any works likely to result in significant interruption in the provision of any such services for occupiers of the remainder of the building. 

2.3           Consider also the situation where other premises sit underneath the building in question.  In such a case, if there is a significant overlap then it is likely the premises will not be enfranchiseable.  See in particular the case of Holding and Management Solitaire Limited -v- 16 Finland Street RTM & Co Limited [2007] PLSCS214.

2.4           This case considered the meaning of the words “vertical division of a building” as used in the 2002 Act.  Any significant deviation from a vertical division of the building would stop it being the subject of a claim for the right to manage.  A similar interpretation is likely to apply in relation to a 1993 Act enfranchisement claim. 

2.5           In Holding and Management the Lands Tribunal held that in order to qualify for the right to manage there must be a clear vertical division of the building. A 2% variation in overlap with a neighbouring building meant that there was no vertical division and that the building did not qualify. The test under s.72 of the 2002 Act is identical to that under Section 3(2) of the 1993 Act and it is likely that similar considerations would apply.

2.6           The case of Oakwood Court (Holland Park) Limited v Daejan Properties Limited [2007] 1. EGLR also considered the provisions of Section 3(2). In this case HH Judge Marshall set out a useful five point test:-

2.6.1      Identify the services provided to the occupiers of the enfranchising part which are in issue because they are not independently provided;

2.6.2      Consider whether those services can be provided to the enfranchising part independently of the provision of the same services to the remainder of the building;

2.6.3      Ascertain the works required to separate the respective parts of the services supplying the enfranchising part and the remainder of the building, so that such services would thereafter be supplied to each such part independently of the other;

2.6.4      Assess the interruption to the latter services (i.e. those serving the neighbouring block) which carrying out those works would entail; and finally

2.6.5      Decide whether this is significant within the meaning of the sub-section.

2.7           It is also worth contrasting the question of what constitutes “the building” under the 1993 Act with the position under the 1987 Act. In particular the often criticised decision of Long Acre Securities v Karet [2004] EWHC 442 (Ch) 61, provides a slightly ‘artificial’ and expanded definition to include more than one structure within this ‘definition.’

2.8           Both the test in Oakwood Court and the comparison with the 1987 Act were considered in the Albert Palace Mansions case - Albert Palace Mansions (Freehold) v Ltd v Craftrule Limited [2011] EWCA Civ 185.

2.9           Notwithstanding the difficulty of determining the extent of a ‘self-contained part of a building’ which may involve various structural considerations, it is no longer the case that the enfranchising tenants are obliged to enfranchise in respect of the smallest ‘enfranchiseable unit’ in the building.

2.10        In this case the tenants of part of a terrace known as Albert Hall Mansions were able to claim the freehold to the whole of the property on the basis of the number of qualifying tenants distributed throughout the building, even though the premises could be sub-divided into two smaller parts each of which would have satisfied the test of being a self-contained part of a building.

3.         Excluded Premises

The 1993 Act will not apply if more than 25% of the internal parts for the area of the premises taken as a whole are used for purposes other than residential (Section 4).

3.1       In making this assessment, the applicable test is to consider the areas on a net  internal floor area basis and to disregard any common parts.

3.2       The case of Marine Court (St Leonards-on-Sea) Freeholders Ltd v Rother District Investments Ltd [2008] 02EG148 is a good example of the practicalities of this.

3.3       This case dealt with two questions concerning whether a building qualifies for enfranchisement and the exemption in Section 4 concerning non-residential elements in the building.

3.4       The first question was whether the commercial element of any common parts should be considered when calculating the percentage of the premises to be considered for the purposes of Section 4 of the 1993 Act (in calculating whether the non-residential area premises exceeded 25% of the internal area of the premises taken as a whole).

3.5       In carrying out such a calculation it is normally necessary to consider the non-residential areas and in addition any parts of the building which are not common parts will also count against the enfranchising tenants in calculating the percentage. 

3.6       In this case the building was divided into two elements, 14 floors with 168 flats on the upper floors and 20 shops at ground level. 

3.7       Part of the building was a business complex and although the tenants had no access to the common parts of this part of the building these areas were to be excluded from the calculation of the “non-residential” part of the building.  Accordingly, the building fell to be enfranchised.

3.8       A second and interesting point was that to achieve the relevant proportion from the residential perspective it was necessary to include certain balconies in the calculation.  Demised balconies which were wholly enclosed could be included within the calculation of the internal floor area of the building. 

B.        Appurtenant Land

4          What is Included in the Claim?

4.1       It goes without saying that the footprint of the building itself will be included as the specified premises in accordance with the provisions of Section 1.  The problems start when it becomes necessary to consider what other additional property is also capable of inclusion in the claim.

4.2       Appurtenant property breaks down into two categories, as identified under Section 1(2)(a) and (b). This is property which is demised under the Lease held by a qualifying tenant of a flat contained in the relevant premises[3], or it is property which the tenant is entitled to use under the terms of his Lease in common with the occupiers of other premises (whether those are contained in the relevant premises or not). [4]

4.3       Section 1(2)(b) has the effect (via Section 2) of including within the property which may be within the claim, areas inside the property falling within the common parts held on a superior or other Lease.

4.4       Difficulties arise in practice where the specified premises and the appurtenant property are not separately identified.  Further scope for difficulty can arise where appurtenant property is erroneously included in the claim.  For instance, consider  a claim to the reversion of a Lease of a car parking space which is owned by someone who is not a long leasehold flat owner in the building. 

4.5       Although, by way of contrast, the landlord can compel the nominee purchaser to take a transfer of any areas that would be of little use or benefit to him, or that would cease to be capable of being reasonably managed or maintained by him (See Section 21(4)).

4.6       The landlord is entitled to reserve back rights in favour of itself under Section 1(4) over any property that is used in common under the terms of the Leases.  Consider common areas such as yards or gardens which are not exclusively demised to be capable of falling within this definition. 

4.7       The landlord will satisfy the requirements of the Act if they grant permanent rights over these areas that will ensure the nominee purchaser has the same rights over these areas as the flat owners would do under the terms of their Leases. In particular see the case of Shortdean Place (Eastbourne) Residents Association v Lynari [2003] 3 EGLR 147.

4.8       In the Shortdean Place (Eastbourne) Residents v Lvnari case four Initial Notices were served and these claimed a number of areas comprising the specified premises appurtenant land, effectively claiming everything within the boundaries of the site. 

4.9       The landlord served a counter-notice under Section 21 admitting the right to enfranchise, but not in respect of the common areas which had formed part of the claim.  Under the terms of their leases, the tenants had rights to use the garden areas in common along with the access road and footpaths which were part of the claim. 

4.10     The LVT held initially that the whole site could be acquired and a dispute arose as to the interpretation of the test in Section 1(4)(a) of the 1993 Act.

4.11     It was held on Appeal that the right of acquisition of such property as mentioned in Section 1(3)(b) “appurtenant land used in common” shall be taken to be satisfied if there are granted by the freeholder over that property such permanent rights as will ensure that thereafter the flat owners as nearly as may be the same rights as those enjoyed in relation to the property on the relevant date under the terms of his lease. This being the test as set out in Section 1(4).

4.12     The wording ‘shall’ in Section 1(4) is mandatory and not optional.  As such, the LVT could not order the landlord to transfer the common areas provided that Section 1(4)(a) was satisfied.[5]

5.         Leasehold Interests

5.1       The case of Hemphurst Limited v Durrels House Limited [2011] UKUT 6 (LC) LRA/27/2009 provides some clarity regarding the acquisition of ‘common’ areas that are held under a lease and liable to acquisition under Section 2(3)(a) and (b). In this case the nominee purchaser sought to acquire part only of a lease that comprised amongst other things the roof area and which was demised on terms that would permit the landlord to carry out significant further development.

5.2       Section 2(2) permits the acquisition of leasehold interests that are either common parts, or appurtenant property where the interest in question needs to be acquired because it is reasonably necessary for the proper management or maintenance of those areas.

5.2       The Hemphurst case establishes the principle that the nominee purchaser can acquire part only of a lease of other parts of the building that demised common parts. The landlords having argued unsuccessfully that Section 2 would require the purchase of the whole of the landlord’s interest under that lease[6].

5.3       Section 2 also has interesting application in the case of say a porter’s flat which is often held ‘in hand’ by a head landlord who has a head lease of the whole of the building.

5.4       The case of Panagopolous (Earl Cadogan v Panagopoulos [2010] EWCA Civ 1259), deals with this question. In this case (where the building was structured in such a way), the tenants had the right to the services of a porter under the terms of their leases.

5.5       The question therefore arose as to whether the nominee purchaser had the right to acquire the porter’s flat under Section 2(3). The existence of the porter’s flat was taken to be a common facility and as such a ‘common part’ falling to be acquired. The reasoning being that the nominee purchaser would require ownership of this area in order to provide a caretaker – on the basis that this was reasonably necessary for the proper management of the property.

5.6       Another important point to bear in mind with such interests is that following on from the case of Aggio, such interests are – if they have an immediate occupational interest and comprise a ‘flat’ - also qualifying tenancies in themselves.   As such they should be particularised as qualifying tenancies on the initial notice. As to whether they will be acquired will depend on a consideration of whether they constitute a ‘common part’ or some kind of appurtenant property as with the case mentioned above[7].  

C.        Plans and Preparation

6.         The Initial Notice – signing

6.1       The case of City and Country Properties Limited v Plowden Investments Limited [2007] L&T R 15 first raised the question as to how a body corporate can sign an initial notice ‘personally.’ In this case it was held that the company must execute a notice as a deed in order to sign it.

6.2       Hilmi and Associates Limited v 20 Pembridge Villas Limited [2010] EWCA CIV  314 re-enforces the principle in Plowden. Where a company is a qualifying tenant it must the sign the initial notice by executing it in accordance with the requirements of the Companies Act (in the case in question, this was Section 36A of the Companies Act 1985 which was in force at the relevant date). 

6.3       The execution of documents by a company is now governed by Section 44 of the Companies Act 2006.  Valid execution will require affixing the company’s seal, the signature of two authorised signatories or the signature of a director in the presence of a witness.  Care should be taken to ensure that corporate bodies correctly sign the documents. 

6.4       Different considerations will apply to overseas companies.  Overseas companies can generally execute by affixing their common seal or by executing the document in any manner permitted by the laws of the territory where the company is incorporated. 

7.         Cascades & Quayside Ltd v Cascades Freehold Ltd [2007] EWCACIV1555

7.1       This is an important case for those acting for large numbers of tenants on a collective claim.  It appears that a Section 13 Notice was circulated in many parts and only a blank signature page was sent to the tenants for signature and return.  On further enquiry by those acting for the landlord, it was found that less than 50% of the tenants had actually seen the initial notice which was not in existence when the majority of them had signed the forms.  Not all the participants were aware of the purchase price, or other key facts such as the deadline for the Respondent to serve the Counter Notice. 

7.2       The Court of Appeal held that this was not a valid Notice.  However, the court declined to provide explicit guidance as to what will suffice in these circumstances. However, it would appear that if composite signature pages are to be used on the notice the final form must be approved by those signing it, and they must have seen it in its final form before the notice is served. 

We hope you have found these notes useful. However they are general in nature and for information purposes only. They are not a substitute for legal advice.  Therefore neither the author, ALEP or Bishop & Sewell LLP can accept any responsibility whatsoever for any loss howsoever arising in connection with any use of the contents of these notes.

www.bishopandsewell.co.uk

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Acquiring part of a leasehold interest of a common area in enfranchisement - Hemphurst Limited v Durrels House Limited [2011] UKUT 6 (LC) LRA/27/2009

Until the early part of 2011 there was something of a debate as to whether the enfranchising tenants in a collective claim could seek to acquire part of a leasehold interest that might have comprised appurtenant property or a common part of their building.

Earlier authority on this point Kintyre Limited v Romeoarch Property Management Limited [2006] 1 EGL makes plain that where an area is necessary for the proper maintainance and repair of the property that this will be capable of acquisition in accordance with the test in the statute.

However the Hemphurst case confirms that it is possible for the enfranchising tenants to acquire part only of such a leasehold interest.  

The case of Hemphurst Limited v Durrels House Limited [2011] UKUT 6 (LC) LRA/27/2009 provides some clarity regarding the acquisition of ‘common’ areas that are held under a lease and liable to acquisition under Section 2(3)(a) and (b).

In this case the nominee purchaser sought to acquire part only of a lease that comprised amongst other things the roof area and which was demised on terms that would permit the landlord to carry out significant further development.

Section 2(2) permits the acquisition of leasehold interests that are either common parts, or appurtenant property where the interest in question needs to be acquired because it is reasonably necessary for the proper management or maintenance of those areas.

The Hemphurst case establishes the principle that the nominee purchaser can acquire part only of a lease of other parts of the building that demised common parts. The landlords having argued unsuccessfully that Section 2 would require the purchase of the whole of the landlord’s interest under that lease[1].

Mark Chick

7 October 2011

This note (being very general in its nature) is not a complete statement of the law in this area.  It is therefore not a substitute for legal advice from a suitably qualified professional and should not be relied upon as such. No liability can therefore be accepted for any actions based on reliance upon it.

If you require legal advice please visit www.bishopandsewell.co.uk

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The Supreme Court has listed the combined appeals in the cases of Lexgorge and Hosebay for hearing on 22 May 2012. For those of us eagerly awaiting the next instalment in developments in this area, we had better be patient.

Mark Chick

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The Supreme Court has granted leave to appeal the decision of the Court of Appeal in Lexgorge. It appears that the deWalden Estate has certainly not given up the fight. The Grosvenor Estate has also intervened as an interested party. 

So, the argument continues to run about what constitutes a house for the purposes of the 1967 Act. 

Subsequent reforms to the legislation have meant that property originally designed for residential purposes (and indeed possibly adapted to another use) will qualify for the right to purchase the freehold even if not all of the property is being used for residential purposes at the date of the claim. This may be in part regardless of whether some or all of the terms of the lease restrict the use of part of the property away from residential use. 

Provided that the property fits the basic criteria - namely that the lease in question was for 21 years or more at grant and that the property comprises the whole of the 'house' in question with no 'material' degree of overlap. 

The tenant needs to have the majority of the occupational interest - although a lease subject to a lease of a flat forming part of the whole will qualify provided that a residence test can be satisfied. Apart from that there are few restrictions in terms of the identity of the tenant, which generally does not need not be in 'residence' and need need not be an individual. 

If there is a business tenancy then it must be for at least 35 years. If the tenancy is one with 1954 Act protection it will not qualify, however, this requirement can often be subverted by the tenant going out of occupation and sub-letting to a related entity.

The position for mixed use property is likewise not good from the landlord's perspective as the law currently stands. 

For instance a shop with a flat above, held on a single lease, where the tenant is not in occupation for business purposes will qualify. The leading case being Tandon from 1982.

The law on this point was developed when there was a residence test and the removal of this following the 2002 Act reforms has not impacted on the enfranchiseability of this sort of building - despite the best efforts of landlords to attempt to suggest otherwise (see the Hareford decision). 

The law in this area is ripe for re-examination and Lord Neuberger almost hinted as much in the Court of Appeal decision in Hosebaywhen he mentioned the law of 'unintended consequences'. 

It will be interesting to see whether the Supreme Court will take this opportunity to provide a greater degree of clarity in this area. 

Mark Chick

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This note (being very general in its nature) is not a complete statement of the law in this area.  It is therefore not a substitute for legal advice from a suitably qualified professional and should not be relied upon as such. No liability can therefore be accepted for any actions based on reliance upon it.

If you require legal advice please visit www.bishopandsewell.co.uk

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As reported today on the BBC News Website (and elsewhere) it appears that the heady world of Leasehold Reform has not entirely escaped the government's attention in the current spending review.

There are two announcements relevant to those interested in this sector.

Firstly, it seems that the Residential Property Tribunal Service (RPTS) is to be amalgamated into the Ministry of Justice (MoJ).

Whilst this might ultimately be part of the wider legislative scheme envisaged by the Tribunal Courts and Enforcement Act 2007 of harmonising all tribunals eventually into one 'unified' service, this change is probably quicker than the LVT itself would have liked.

On the table for discussion must surely be the question of hearing fees, a unified set of procedural rules and closer harmony with the other "Lower Tier" Tribunals. Whether this is in the long term interests of 'consumers' of these services remains to be seen.

Any enhanced procedural rules are only likely to drive up costs for those subject to them and hopefully common sense will prevail so that any changes are not too significant.

As to hearing fees, whilst perhaps these are an inevitability, I for one would like to see these introduced on a tiered basis related to value so that there is no effective deterrent to access to justice for lower value cases which are either of general importance, or which genuinely merit a hearing because of the obstinance of one of the parties.

Perhaps the controversial question of whether the LVT should have a more significant costs jurisdiction, (including perhaps the power to decide that one of the parties should pay any hearing fee) will also have to be considered.

As to the second annoncement, it seems that LEASE, the non-governmental organistion set up to advise on the Leasehold Reform legislation and which provides a free advice service is to be amalgamated into another government body. More precise details are awaited in the formal announcements.

Whilst consumer awareness in this sector has improved (as has the quality of service provision itself), there is still a need for the promotion of access to information and education concerning this sector.

Mark Chick

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What is the smallest enfranchiseable part of a building ? – Craftrule Considered – Craftrule Limited v 41-60 Albert Palace Mansions (Freehold) Limited [2010] EWHC 1230 (Ch)

The Leasehold Reform Housing and Urban Development Act 1993 (as amended) (‘the 1993 Act’) gives long leasehold flat owners the right to purchase the freehold to their building, provided that they act collectively and in accordance with the procedures set down in the 1993 Act.

In order to exercise the right 50% or more of the qualifying tenants in that part of a property to which the claim is made must act collectively. A question therefore arises on the investigation (or instigation) of a claim as to how many of the flat owners in a particular part of the property are taking part in the claim and whether their number is sufficient.

Section 3 of the 1993 Act provides that the right to claim the freehold applies to any premises that are a ‘self-contained part of a building’ and contain at least two flats held by qualifying tenants. [1] Of the flats in that part of the building at least 2/3 must be qualifying tenants.

In assessing whether premises form a ‘self-contained part of a building’ the test is that this part must be a vertical division of the building and structure such that the relevant part could be developed independently of the remainder of the building and the ‘relevant services’[2] required for that part of the building are provided independently or could be provided without significant interruption in the provision of such services to occupiers of the remainder of the building.

Whilst there have been previous decisions on what constitutes a self-contained part of a building[3] the point arising in Craftrule has not been considered before. Craftrule is an important decision as it shows that a wider interpretation will apply when assessing the ‘part of a building’ and counting the number of qualifying tenants within it.

In Craftrule the participating tenants chose to serve a notice in respect of a building divided in two halves, both of which it was accepted on the facts were capable of independent redevelopment. The distribution of qualifying tenants between both halves was uneven, such that one half of the building would not have qualified in its own right if the tenants there had served a notice in respect of that part. However a combined claim was made counting the total number of participating flats in each of the two halves of the whole building to reach the qualifying number.  

The tenants’ initial notice was challenged by the landlords at first instance and the tenants then appealed to the High Court.

The High Court found in favour of the tenants, accepting an argument advanced by their counsel that the provisions of section 3(1) relating to the building does not require those seeking to exercise their rights under Chapter I of the 1993 Act to select the smallest ‘enfranchiseable unit’ when formulating their claim. Rather, where there are various sections in a building it is open to those initiating the claim to select the division of the property that they are seeking to enfranchise and to then establish a qualifying number in that part.

Comment

The decision in Craftrule is important as it means when assessing how many flats are in a particular part of a block to count in a qualifying number for the purposes of a claim to the freehold the flat owners no longer have to serve a notice in respect of each of the smallest ‘enfranchiseable’ units in the building. Rather, if the structure of the building is similar to that in Craftrule two adjacent units may be counted together provided that this united structure is a self-contained building.

Another intriguing possibility (as mentioned by James Driscoll in his recent article in the Estates Gazette) is the possibility that if a building is enfranchised in a condition where there are separate sub-units which are enfranchiseable in their own right, is that there is nothing to stop the flat owners in these smaller units bringing a further claim to the freehold in respect of their ‘part’ of the building at a later date. Although in practice whether such subdivision would be practical or desireable remains to be seen.

There is also the possibility of a further appeal by the landlords in this case. So as ever, it is a case of ‘watch this space.’

Mark Chick

5th October 2010

This note (being very general in its nature) is not a complete statement of the law in this area.  It is therefore not a substitute for legal advice from a suitably qualified professional and should not be relied upon as such. No liability can therefore be accepted for any actions based on reliance upon it.

If you require legal advice please visit www.bishopandsewell.co.uk 

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Whilst it appears that the principle of an enhanced 'management risk' associated with flats could give rise to an increase in the appropiate risk premium and hence the deferment rate, those circumstances where this would not be appropriate were also discussed.

The presence of headlease clearly negates some of the 'management headache' assciated with this asset class, but what about the situation where the Right to Manage (RTM) has been exercised ?

In this situation the landlord (arguably) has a reduced management burden - although this of course assumes a well-run RTM company. If the landlord has to exercise his powers to compel the company to comply with its obligations this will not be the case.

Similarly, if the RTM company has the right to place the insurance then arguably one of the motivating factors associated with owning a ground rent is also diminished. So the question then arises as to whether the one cancels the other out.

I expect that in practice the particular property will need to be examined to see which of the following factors are present and are likely to be of significance in arguing for a departure from the Sportelli deferment rate of 5% for flats. Briefly, these seem to be:-

1. Whether there is a headlesse in place (with management responsibility).

2. Whether there is a 'third party' management company (a party to the leases and with all the flat owners as members) and with the power to set the service charge.

3. Whether the Right to Manage has been exercised.

4. In the case of a small block (usually two flats) whether the leases impose a full repairing obligation on the flat owners (I.e. Where there is no service charge).

I would be interested to know what other practitioners think.

Mark Chick
22.06.2010

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Variation of lease terms – ‘unfair’ service charge proportions – Morgan v Fletcher and others UKUT 186 (LC) and the 1993 Act contrasted

There is an interesting interplay between the limited power of the LVT to vary the terms of lease during the renewal of a lease under the 1993 Act and the wider discretion of the LVT to deal with a situation where the service charge provisions in a lease are ‘defective’ in an application made under the Landlord and Tenant Act 1987 (‘the 1987 Act’).

Often the flat owner seeking a lease extension may want (not unreasonably) to tackle any perceived (or indeed actual) injustices in his current lease. What is not always realised by those unfamiliar with this area is that the power of the tribunal to amend or vary lease provisions in a lease renewal is in fact fairly limited.

1993 Act

Section 57 of the 1993 Act permits variations of the lease terms but only where these are ‘necessary’ to remedy a defect. In particular, in a case where there are significant problems – e.g. where the landlord might not be able to recover any service charge, or sums payable for insurance for instance, the tribunal will have discretion to order a change.

In a situation like this can the LVT assist using its jurisdiction under the 1993 Act ?

The first thing to note is that the LVT has a very limited discretion to make any substantive changes to the terms of the existing lease. See in particular the Lands Tribunal’s decision in the case of Gordon (Gordon v Church Commissioners LRA/110/2006),

Secondly, in a lease renewal under the 1993 Act the tribunal is only concerned with the terms of one lease – the lease in question – and as such it does not have a power to vary the terms of other leases in the building. 

In particular section 57 (2) provides that:-

Where during the continuance of the new lease the landlord will be under any obligation for the provision of services, or for repairs, maintenance or insurance—

(a) the new lease may require payments to be made by the tenant (whether as rent or otherwise) in consideration of those matters or in respect of the cost thereof to the landlord; and

(b) (if the terms of the existing lease do not include any provision for the making of any such payments by the tenant or include provision only for the payment of a fixed amount) the terms of the new lease shall make, as from the term date of the existing lease, such provision as may be just—

(i) for the making by the tenant of payments related to the cost from time to time to the landlord, and

(ii) for the tenant’s liability to make those payments to be enforceable by distress, re-entry or otherwise in like manner as if it were a liability for payment of rent. 

So unless the service charge adjustment that is sought can be made by an amendment to the individual lease alone and the applicable test(s) in Section 57 can be met, not much can be done simply by pursuing a lease extension.

1987 Act

Consider the case of a situation in a block where the service charge percentages do not add up to 100%. This may of course be a situation of real injustice and statute provides a remedy in Section 35 of the 1987 Act. This permits the tribunal to make an order varying the lease terms in a building to resolve such a situation.

Section 35(4) of the 1987 Act sets out a test for a situation where a lease fails to make satisfactory provision for the calculation of service charges however, this is limited to a situation where the overall proportions paid by the flat owners either exceeds or is less than the landlord’s total expenditure.

In practice, there are sometimes situations where the service charge proportions are allocated in a way that is perceived to be ‘unfair,’ – for instance the owner of a large flats may pay the same as (or perhaps less) than the owner of a smaller unit.  If the overall percentages add up to 100% as the case of Morgan shows, the 1987 Act does not provide a remedy.

Morgan v Fletcher [2009] UKUT 186 (LC)

In this case, 6 out of 8 flat owners made an application to the LVT asking for a variation of their leases on the basis that the service charge percentages under all the leases added up to 116%. Of the two remaining leases one was owned by the landlord. As a result of the application the landlord varied the service charge proportion in the other two leases to bring the total recoverable percentage down to 100%.

The flat owners applied to the LVT on the basis that they considered that the allocation of the percentages between the flats was of itself ‘unfair.’ The LVT adjusted the percentages and the landlord appealed.

The Lands Tribunal considered the provisions of Section 35(4) of the Landlord and Tenant Act 1987 and gave a narrow construction to the circumstances in which an order varying lease provisions can be made. The interpretation of Section 35(4) provided by this case is that only the circumstances set out in that section can give rise to a situation where lease terms can be varied.  

In other words, a situation where the service charge proportions seem to be allocated between the flats in a way that was perceived to be ‘unfair’ was not enough in itself to warrant a variation in the lease terms. Particularly if the service charge proportions added up to 100% of the landlord’s total expenditure.

Comment

On policy grounds the decision in Morgan may be a sensible decision – it would of course be impossible to devise a test of what constituted an ‘unfair’ allocation of service charges in a building where the total percentages added up to 100% - although perhaps greater flexibility could have been given.

There are good policy reasons for not wanting to ‘open the floodgates’ to claims based on ‘unfair’ service charge proportions, but in practice this case does nothing to assist those whose fundamental problem is with the size of the service charge percentage allocated to their flat.

There is a reluctance to interfere with the freedom of contract of the original parties to the lease.

The only other way of resolving this sort of issue would therefore seem to be where either lease variations can be agreed between all interested parties or, possibly if the problem arises because of a ‘mistake’ by the parties to the original lease by rectification of this.

If the flat owners buy their freehold with 100% participation (and have all agreed in advance to vary the lease terms once this is done) then this might be another means of addressing the problem.

Mark Chick

25 May 2010

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The generic rate of 5% for flats set by Sportelli no longer applies automatically and each case should be judged on its individual merits.

In areas outside Prime Central London (PCL) there is scope to argue a higher deferment rate to reflect the greater risk of deterioration and obsolescence (+0.25%) and the prospect of lower capital growth (+0.5%) compared to PCL.

In all areas, including PCL, there is scope to argue a higher deferment rate to reflect the increasingly onerous management burden and liability associated with flats compared to houses (+0.25%).

Background

The Sportelli case was an aggregated number of appeals to the Lands Tribunal concerning Prime Central London (PCL) Leasehold Valuation Tribunal decisions where the deferment rate was an issue.

For the first time evidence from financial experts, in addition to valuers, was relied upon in determining the deferment rate.  Their decision was based on the following formula;

Risk free rate 2.25% - based on a 5 year rolling average for index linked gilts

Less

Real growth 2.00% - based on growth of property above inflation 

0.25%

Plus

Risk premium 4.50% - based on risk of property as an asset class distinct from gilts

Extra risk for flats 0.25% - based on additional management compared to houses

Deferment rate 5.00%

Although all the properties were in PCL the Tribunal stated that they saw no reason, based on the evidence before them why this decision should not apply outside of PCL.  The financial evidence was of the opinion that over a long period (say 50 years) property growth was the same across all regions, both prime and secondary, and as such there should be no distinction for location. Accordingly a precedent was set which has been applied by LVT’s throughout England and Wales with little exception.

This decision was appealed to the Court of Appeal who upheld the Lands Tribunal’s decision but left the door ajar by suggesting that further evidence could be presented, in particular regarding the risk premium, for different areas.

The Kelton Court decision

This was an appeal to the Lands Tribunal of an LVT decision which had applied the Sportelli precedent of 5% to multiple lease extension claims in a 1930’s purpose built block in Edgbaston, Birmingham.

The basis of the risk free rate (2.25%) less real growth (2%) remains the same but the leaseholders’ valuer successfully argued the additional risk premium (4.5%) and allowance for flats (0.25%) applied in Sportelli did not fully reflect the circumstances of this case;

·       Deterioration and Obsolescence – it was held that the comparatively low value of property in Birmingham compared to PCL, coupled with not dissimilar costs of repair, made it less economically viable to keep property in good repair leading to a greater risk of deterioration not reflected in vacant possession values.  Accordingly an extra 0.25% was added to the risk premium.

·       Prospect of future growth – it was held that the real growth rate of 2% determined in Sportelli for PCL might not be achievable in Birmingham based on a comparison of the statistical date presented. The evidence presented was the Nationwide Regional Index for the West Midlands and the corresponding Halifax Regional Index compared to the Knight Frank Index for Kensington & Chelsea (part of PCL where the Sportelli cases were situated) which showed a considerable difference in growth between the areas.  Accordingly an extra 0.5% was added to the risk premium.

·       Allowance for flats – Sportelli established the principle that the management of flats compared to houses was more complex and warranted a 0.25% addition to the deferment rate.  Sportelli did not consider it justified to differentiate between flats that are subject to head leases, nor between small and large blocks of flats.  In Kelton Court the leaseholder’s valuer successfully argued that the introduction of The Service Charges (Consultation Requirements) (England) Regulations 2003 made the management and risk associated with flats much greater.  Accordingly an extra 0.25% was added to the 0.25% adjusted made by Sportelli.  The point was made that had there been a head lease, thereby placing the management risk and burden on the head lessee rather than the freeholder, an extra 0.25% on the deferment rate would not have been appropriate.

The overall result of these additions was to increase the deferment rate in the Kelton Court case from 5% to 6%.

Our Conclusions

·       This decision has proved that it is possible to achieve a higher deferment rate but only subject to producing new evidence.  We do not consider it reasonable to simply rely on this decision as a precedent, unlike Sportelli, and so the onus must be on the leaseholder to produce and successfully argue new evidence. 

·       It does raise the possibility of the RICS being asked to commission research into regional variations in growth to see how they compare to PCL.

·       Where there is a head lease the freeholder’s deferment rate should not be affected on the grounds of complex management. 

·       We further believe that in small buildings such as converted houses with only 2 or 3 flats the extra 0.25% should not apply irrespective of whether there is a head lease or not.  We consider the lack of communal areas and lack of shared services results in either no annual service charges or very often a simple apportionment of the buildings insurance premium.  In such cases we consider the additional 0.25% is not appropriate.

·       The possibility of a future Right to Manage (RTM) company could be used as an argument to mitigate the freeholder’s management risk as a counter to the threat of an extra 0.25% being added to the deferment rate. 

James White 31/03/2010

2

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An interesting point arising from the discussions in the Kelton Court seminar group at the ALEP Conference on Wednesday was that the question of the 'management risk' associated with flats might also be abated not only in a situation where there is a head lease, but also if the flats are subject to 'maisonette' style leases.

These are effectively fully repairing and insuring residential leases typically found in small blocks of not more than 2 or 3 flats where all the maintenance responsibility and the obligation to insure rests with the individual flat owner.

In these leases the structure of the covenants is such that the property is divided into 'layers' with each owner fully responsible for the structure and interior at their 'level.'

This is certianly a good point and one no doubt that will be taken in practice against anyone trying to argue for a 0.5% enhanced management risk factor in such a situation.

I would be interested to hear if anyone has encountered such an argument.

Mark Chick

12.3.2010

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When is a house not a house ?

The answer appears to be when it is on the Grosvenor Estate, used 88.5% as offices and has a lease clause that restricts the property to such use under the terms of the lease.

The latest case on what constitutes a house for the purposes of enfranchisement under the Leasehold Reform Act 1967 takes the question of ‘what is a house?’ a step further although, as the tenant has abandoned their proposed appeal to the House of Lords, we will not be treated to further judicial consideration of the question in this case.

The case in question is Grosvenor Estates Limited v Prospect Estates Limited [2008] EWCA Civ 1281.

In Prospect, the facts were that the building constructed in or around 1850 as a house. Since construction two floors had been added and at the date of the notice of claim in early 2007, the property was held under the terms of a lease for use as offices, with only the topmost floor being set aside for residential purposes.

The terms of the lease stated that the top floor was to be used for residential purposes only by a director, partner, officer or senior employee of the company person or firm in occupation of the remainder of the building.

On the facts 88.5% of the building was used for non-residential purposes under the terms of the lease. The building had been used in this way for the last 50 years.

At first instance the court had determined that the building was a house within the meaning of the 1967 Act. The landlord appealed.

The Court of Appeal reviewed the relevant authorities on this point and considered the applicable tests to be as follows:-

1. If a mixed-use building can reasonably be called a house, it remains a house within the meaning of the 1967 Act even if it could reasonably be called something else.

2. Whether it is reasonable to call something a house is a question of law.

3. If a building is adapted or designed for living in only in exceptional circumstances can it not reasonably be called a ‘house.’

The Court of Appeal (Mummery, LJ) considered that the above principles had been applied without taking into account the full factual circumstances. The requirement in the lease that the building should be used pretty much wholly as offices was persuasive. A consideration of the internal and external features was not enough.

Accordingly, at the relevant date the building was not a house within the 1967 Act and the tenant’s claim failed.

Mark Chick

9^th March 2009

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A key issue for tenants serving notice on their landlords to purchase their freehold or extend their lease under the provisions of the 1993 Act will always be the offer figure put forward in their initial notice. ‘If the offer figure is too low, the claim will be invalid’ is the conventional wisdom. But is this quite correct?

The starting point is the case of Cadogan v Morris [1996] 4 All ER 643 a Court of Appeal decision in which it was held that simply putting forward a nominal figure (such as a pound) which could not represent adequate compensation in the particular case would invalidate the notice. Following Morris tenants have been advised (no doubt correctly) to obtain valuation advice in order to ensure that they put forward a ‘reasonable offer figure.’

This point was considered further in 9 Cornwall Crescent (London) Limited v Kensington and Chelsea Royal London Borough [2005] EWCA 324, a case which concerned the landlord’s counter-notice and whether this could be invalid if the response figure was too high. The Court of Appeal considered that a subjective element of genuineness was all that was required for the landlord’s counter offer to be valid and that this would meet the subjective test in Morris that it should be made in ‘good faith.’

However, a decision of the Central London County Court from the end of last year (Magnet v Renshaw) shows a further degree of latitude, which may open the door further for the tenant whose offer figure is under attack for being too low.

In Renshaw (which is perhaps more well known for its guidance on who has the actual capacity to serve the counter-notice when the reversion is sold) the court also considered a challenge to the tenants’ offer figure. The court held that the 9 Cornwall Crescent requirement of ‘good faith’ applies equally to the tenant’s offer. In Renshaw the judge rightly said that valuation evidence was of itself not conclusive as to the bona fides of the person making the offer.

Following Renshaw it seems that the tenant’s offer figure could be one that is below the acceptable range of values (as might be ascertained by later valuation evidence) provided that it is made honestly and in good faith (and presumably therefore not merely a nominal figure).

What this means in practice, is that in cases where a tenant has made an offer (honestly, and perhaps without the benefit of valuation advice) that all may not be lost, notwithstanding perhaps a large disparity between the offer figure and the landlord’s counter-notice figure. 

Mark Chick

27 August 2008

Mark Chick is a partner at Bishop & Sewell LLP, a committee member of ALEP and is a solicitor specialising in leasehold reform and landlord and tenant matters: www.bishopandsewell.co.uk.

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An interesting case from the High Court from the back end of 2007 that appears to have escaped much notice is Typeteam (Typeteam Limited v Douglas James Acton and Sarah Louise Elizabeth Lea CH/07/PTA/0067).

This was a case concerning the assignment (or purported assignment of a Section 42 notice). In August 2006 Mr Rosner entered in to a contract to sell Flat 20, Cavendish Mansions, Mill Lane Hampstead to Mr Acton and Ms Lea. On the same day Mr Rosner served a valid section 42 notice on the landlords, Typeteam Limited.

The contract contained a provision requiring the benefit of the notice of claim to be assigned to the buyer on completion. The clause was in fairly standard terms. The parties also entered into a deed of assignment on the same day in relation to the notice.

However the deed of assignment contained wording to the effect that in consideration of the purchase of the flat, Mr Rosner:-

“hereby assignes unto the the buyers all that right and interest to obtain an extended lease of the property by virtue of service by the seller of the s.42 notice…”

Registration of the transfer completed on 21^st September 2005. On 3^rd November 2005 the landlords served counter-notice expressed to be without prejudice to the contention that the claim had been deemed to be withdrawn by virtue of s.43 of the 1993 Act.

Section 43 of the 1993 Act provides in particular (Section 43(3)) that:

“Notwithstanding anything in subsection (1), the rights and obligations of the tenant shall be assignable with but not capable of subsisting apart from, the lease of the entire flat; and if the tenant’s lease is assigned without the benefit of the notice, the notice shall accordingly be deemed to have been withdrawn by the tenant as at the date of the assignment.”

The conventional wisdom is to rely on the provisions of s.27 of the Land Registration Act 2002 and to assume that the transfer cannot take effect at law until such time as the registration completes. Traditional transfer wordings therefore make mention of the fact that the transfer is not to take effect until such time as the registration completes and the notice is to vest in the buyer from that point.

Following service of the negative counter-notice the landlords commenced court proceedings for a declaration that the notice was deemed to be withdrawn on 7^th July 2006. On 20^th July 2006 Mr Rosner and the new owners entered into a deed of rectification seeking to rectify the assignment of the rights so that the deed of assignment should be read as if the assignment took place when the new owners became the registered owners of the flat.

In Typeteam Judge Cowell in the County Court heard argument from the landlords to that effect. However, he rejected this saying that in his view it was permissible to interpret section 43(3) as also including an equitable assignment so that there was no deemed withdrawal of the claim.

Whilst the landlords appealed the High Court agreed with the lower court and held that Mr Rosner had done ‘everything he could’ to pass the rights on to the buyer.

The court held that the clear intention of the parties was to assign the rights under the s.42 notice and that those rights should pass with the benefit of the lease. The assignment ‘could not take effect any other way.’

As such Sir Donald Rattee held that any other construction would have produced a ‘wholly unrealistic’ and ‘nonsensical’ result and held that on a ‘proper construction’ the lease was never assigned without the benefit of the s.42 notice and that the notice was not deemed withdrawn by virtue of Section 43(3).

This is an interesting case because it is not completely clear whether the decision tells us that an assignment will not fall foul of the provisions of Section 43(3) if it is expressed in such a way that it could take effect in equity only. The presence of the deed of rectification somewhat muddies the waters. However, notwithstanding the permissive view taken in this case, the standard precedent wording is clearly less likely to cause arguments.

Mark Chick

9^th March 2009

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In this case the tenant had an 18^th Century Central London house. The property was originally designed as a house but had subsequently been used as commercial premises. As at the date that the notice of claim was served under the 1967 Act claiming the freehold to the house the upper floors were dilapidated and not habitable.

The court had to consider the question as to whether the property constituted a ‘house’ within the meaning of section 2(1) of the 1967 Act.  The county court and the Court of Appeal both looked at the meaning of ‘designed or adapted for living in’ as at the date of the notice of claim.

The House of Lords disagreed. It was their view that whether the property was ‘designed or adapted for living in’ at the relevant date was not material and that the question should be considered having regard to whether the property had been designed or adapted in this way at the date it was built.

In this particular case nothing had happened to the building during its lifetime to substantially detract from the fact that the upper three floors had been set out for residential use.

There was an argument that the property had been adapted for mixed business and residential use but if this did not affect the outcome of the appeal. A property does not need to be adapted solely for living in to be a house.

This is an important decision, but one key point to note is that the question as to whether a building originally designed for living in but subsequently adapted to another use would qualify for the purposes of the 1967 Act has not yet been answered.  It is my view that it would not, but we will have to wait and see.

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