Westbrook Dolphin Square Ltd v Friends Life Ltd [2014] EWHC 2433 (Ch)

1.1              Dolphin Square has been a long-running saga, but an important decision for a number of reasons, notwithstanding is slightly unique circumstances.

 

1.2              The subject property contained 1,223 flats and is possibly one of the largest ‘blocks of flats’ in the world. Notwithstanding this, it was potentially enfranchiseable. However, to make it so, Westbrook and a group of others (the Claimants) had to create sufficient underleases to bring the property within the ambit of the 1993 Act. In doing so, they also had to take care to ensure that having put the building into a condition in which it qualified for enfranchisement, that that the leases were vested in sufficiently different legal entities, bearing in mind the anti-avoidance provisions within the 1993 Act which prevent 3 or more flats remaining within the same ownership.

 

1.3              The text of Section 5(5) and 5(6) of the 1993 Act appears below:

(5) Where apart from this subsection—

(a) a person would be regarded for the purposes of this Chapter as being (or as being among those constituting) the qualifying tenant of a flat contained in any particular premises consisting of the whole or part of a building, but

(b) that person would also be regarded for those purposes as being (or as being among those constituting) the qualifying tenant of each of two or more other flats contained in those premises,

then, whether that person is tenant of the flats referred to in paragraphs (a) and (b) under a single lease or otherwise, there shall be taken for those purposes to be no qualifying tenant of any of those flats.

(6) For the purposes of subsection (5) in its application to a body corporate any flat let to an associated company (whether alone or jointly with any other person or persons) shall be treated as if it were so let to that body; and for this purpose “associated company” means another body corporate which is (within the meaning of section 736 of the Companies Act 1985) that body’s holding company, a subsidiary of that body or another subsidiary of that body’s holding company.

 

1.4              As can be seen from the parties’ names in this case, they are both investment companies using the enfranchisement legislation in a way that it was not perhaps first intended by parliament to achieve a commercial objective. Not surprisingly, Friends Life objected to the claim that was made to the freehold on a number of grounds, which are discussed below.

 

1.5              Firstly, they challenged the structure of the identity of the qualifying tenants on the basis that the under leases that had been created (and took over 2 years to put in place) were held by a number of SPVs created for the purpose and that these were ‘associated companies’ and as such the claim would fail as it would fall foul of the provisions of section 5(5) of the 1993 Act. However, the structure that had been put in place by Westbrook was sufficiently disparate to avoid this problem. The SPVs in question had shares held by two companies, neither of which had overall control as they each held exactly 50% of the voting rights. Additionally, the shares in one of the companies were held by a discretionary trust and the trustees of that were completely independent.

 

1.6              Secondly, the High Court held that there was nothing in the scheme of the 1993 Act that would stop one investor enfranchising against another. Whilst the Act contained provisions to limit the right to enfranchise in certain cases involving investors the provisions of section 5(5) and (6) were quite narrow and it was irrelevant if these consequences were not something that parliament had specifically intended when passing this legislation.

 

1.7              Thirdly, a challenge was brought on the grounds that the property did not qualify  for enfranchisement under the 1993 Act on the basis that more than 25% was used for ‘non-residential’ purposes. The areas in question were short-term lets, but were self-contained units of accommodation, which were in fact flats (rather than hotel rooms) because of their self-contained nature.

 

1.8              Fourthly, Friends Life sought to challenge the price offered for the freehold (£111M) on the basis that the proposal was not a ‘reasonable’ offer following the line of authority in Cadogan v Morris (1999) 31 HLR 732 . However, on the facts the Court stated that the test to be applied was not an objective test to see whether the figure in fact fell within a certain factual bandwith, but rather that the tenant’s proposal needed to be a genuine bona fide offer that was intended to be taken seriously.

 

1.9              We can take away from this several important points. Firstly, it is not an abuse of process to initiate a claim and to discontinue it and then bring (after the appropriate period) a further claim on the same basis to enfranchise the same property. Secondly, provided that the scheme of ownership is properly devised, and the interests are genuinely diverse, it is possible to navigate the restrictions on multiple ownership in the 1993 Act. Finally, we have some further observations on the test to be applied to any ‘initial offer’ to be made by the tenant.

 

MARK CHICK

September 2014

This article being general in nature is not a substitute for legal advice. If you require legal advice please visit www.bishopandsewell.co.uk or email: leasehold@bishopandsewell.co.uk