Collective Enfranchisement – Leaseback

 

When a landlord retains a flat in a block which is subject to a collective enfranchisement claim, it can claim a leaseback of it. However, unless the landlord is a local authority or housing association, the landlord must make sure that a leaseback is proposed in its counter-notice otherwise the right will be lost.

The statutory framework

The optional leaseback provisions are contained in section 36 and Schedule 9 of the Leasehold Reform Housing and Urban Development Act 1993 and apply to flats or other units which are not let to a qualifying tenant at the “appropriate time”, or where the freeholder is a resident landlord and is also a qualifying tenant. The “appropriate time” means the time when the freehold of the flat or unit is acquired by the nominee purchaser. As the issue of whether the landlord is entitled to a leaseback and, if so, what of will need to be determined before the freehold is acquired by the nominee purchaser, this leads to the curious position that the “appropriate time” will inevitably be in the future.

The time lag between the date of service of the counter-notice and the “appropriate time” can lead to some interesting problems.

Proposals for the leaseback must be in the counter-notice

In the case of Cawthorne v Hamdan [2007] EWCA Civ 6, the property comprised six flats in Hove, East Sussex. The qualifying tenants gave notice to the landlord to exercise their right to collectively enfranchise and the landlord served a counter-notice in reply. Section 21 (3)(ii) of the Act provides that the counter-notice must specify any leaseback proposals but here the counter-notice made no mention of a leaseback. It was only once the case reached the LVT for a determination on the price that the landlord finally woke up and served a leaseback notice. The landlord argued that as the relevant date for determining whether a landlord was entitled to a leaseback was the “appropriate time” (which had not yet arrived), a leaseback notice could be served at any time before the acquisition. The nominee purchaser said the notice was too late and the right had been lost and the Court of Appeal agreed. It said the requirements of section 21(3)(ii) are mandatory and if the landlord wants a leaseback it must say so in its counter-notice.

When is a Unit not a Unit?

What happens if a leaseback is requested in the counter-notice but the unit which is to be subject to the leaseback doesn’t exist when the notice is served but will exist at the “appropriate time”?

The case of Barrie House (Freehold) Ltd v Merie Bin Mahfouz Company (UK) Ltd LON/00BK/OCE/2011/0161 raises many issues in relation to leasebacks including what constitutes a unit, when must it exist and whether a unit can be created out of common parts. Barrie House originally had a spacious and pleasant entrance hall with a grand sweeping staircase in the “Bauhaus flyaway style”. Shortly after the Notice of Claim was served by the nominee purchaser, the landlord walled in part of the staircase and began construction of a new flat which incorporated about a quarter of the entrance hall. On the date when the Notice of Claim was served, the flat was not fully built and it was accepted that it was not at that point a “unit” for the purposes of the Act. However, by the time the determination of whether the landlord was entitled to a leaseback of the new flat reached trial, the flat was complete and the “appropriate time” had still not arrived.

The nominee purchaser was represented by Chris Heather (of Tanfield Chambers) who submitted that the landlord was not entitled to a leaseback of any property which at the relevant date was wholly within or which included any of the common parts of the building. He also said that the landlord was not entitled to a leaseback of any property which was not a “unit” within the meaning of the Act when the Notice of Claim was served. Philip Rainey QC (also of Tanfield) argued that the landlord’s right to a leaseback depended solely on whether the property was a unit which was not let to a qualifying tenant at the “appropriate time” and that until the “appropriate time” (which was still to come), the landlord was entitled to form units, whether or not such units incorporated common parts of the building, and to grant leases of those units to non-qualifying tenants to which it would be entitled to a leaseback when the freehold was acquired by the nominee purchaser.

Barrie house – the decision

The First Tier Tribunal concluded that to be the subject of a leaseback, the unit must exist at the date of the notice of claim as well as at the appropriate time. It said the landlord cannot create units between these two dates and require them to be leased back to him. The Tribunal also found that it was not open to the landlord to incorporate in a unit parts of the building which the tenants seek to acquire and which were at the date of their notice of claim a common part of the building. Similarly it could not require a leaseback of common parts which existed at the date of the notice of claim, whether or not such common parts were at that date a unit. On the other hand, if the unit had already been created out of the common parts (without substantially interfering with the tenants’ rights under their leases) before the notice of claim was served, the landlord would have been entitled to a leaseback of it.

The Appeal in this case is due to be heard in May 2014 and the decision is likely to be essential reading for the many knotty problems that can arise in relation to leasebacks.

What is included in the Unit?

The Upper Tribunal has also recently grappled with the problem of leasebacks in the case of Tibber v Buckley and Wilcox [2014] UKUT 0074 (LC), a case in which I represented the Respondent. The building consisted of 3 flats within a converted Victorian terraced house. The landlord had retained the top flat and sought a leaseback of it. The counter-notice proposed a leaseback of “the second and third floors of 32 Petherton Road aforesaid . . (including all roofs and windows therein) and the staircase leading thereto from the first floor.” In the LVT, the landlord expanded what she wanted by way of leaseback to include the structure and exterior of the top flat, the front garden, part of the communal landing between ground and first floor level (the mezzanine) and indeed, at one point, all the common parts of the building!

Paragraph 1(2) of Schedule 9 provides that the unit or flat will include “any yard, garden, garage, outhouses and appurtenances belonging to or usually enjoyed with it and let with it immediately before the appropriate time”. Again the appropriate time is in the future. Neither the mezzanine nor the front garden (which was two floors below the flat) were enjoyed or let with the top flat at the time of the hearing and the LVT found that the “unit” was just the Flat.

The Upper Tribunal agreed with the LVT but went further. It said that, in any event, the Appellant was bound by the terms of the counter-notice and that counter-notice had not made claim to the mezzanine or the front garden. Again it was stressed that the statutory language is mandatory and that if the landlord failed to clearly specify in detail her leaseback proposals in the counter-notice, the opportunity is missed. Permission to appeal has been requested in this case.

Conclusion

In most cases the question of what the landlord will be entitled to a leaseback of will be straight-forward. It will be the flat which he is living in or the flat which he has let out. However, as can be seen from the cases referred to above, there are all sorts of issues which can arise and there is little guidance in the current case-law. The time lag between the relevant date (the date on which the Notice of Claim is served) and the appropriate time (the time when the freehold is acquired by the nominee purchaser), in particular, raises some complicated questions and it will be interesting to see what the outcome of the Barrie House Appeal is.

Nicola Muir
Tanfield Chambers