PROPERTY CONSIDERATIONS FOR ROOFTOP DEVELOPMENTS

 

by

 Jonathan Upton and Michael Walsh

Tanfield Chambers

 

Jonathan Upton specialises in property disputes.  He has been recognised as a Leading Junior for property litigation in the legal directories for several years.  He is “very switched-on and technically very bright” and “very attuned to the client’s interests and goals” (Chambers UK Bar 2018, Real Estate Litigation); “recommended for advising on landlord’s rights” (Legal 500 2017, Property Litigation) and “a first-choice junior for service charge disputes”(Legal 500 2016, Property Litigation).

Jonathan is particularly experienced on matters relating to mixed-use developments.  He regularly advises land owners, developers, institutional lenders and indemnity providers on matters such as easements; restrictive covenants; tenants’ rights of first refusal; development agreements; overage; commercial lease interpretation; the Electronics Communications Code; collective enfranchisement; variation of leases and service charges.

Jonathan’s practice also encompasses co-ownership disputes and applications for orders for sale/TOLATA claims.  He successfully argued for a resulting trust analysis in Chaudhary v Chaudhary [2013] EWCA Civ 758; [2013] 2 F.L.R. 1526; [2013] Fam. Law 1257 and has been involved in a number of cases involving the bona fides of a declaration of trust: Tigris Industries Inc v Ghassemian [2016] EWCA Civ 269; Saranovic v Saranovic Times, March 21, 2017; and Premium Jet AG v Sutton [2017] EWHC 186 (QB).

His other recent notable cases include: Francia Properties Ltd v Aristou & Ors [2017] L. & T.R. 5 (whether roof development interferes with RTM company’s management functions – permission granted for leapfrog appeal to CA); Cowthorpe Road 1 – 1a Freehold Limited v Wahedally [2017] L. & T.R. 4 (Collective Enfranchisement; service of counter-notice by email); Leaseholders of Foundling Court and O’Donnell Court, Brunswick Centre, London v (1) Camden LBC; (2) Allied London (Brunswick) Ltd and Ors [2016] UKUT 366 (LC); [2017] L. & T.R. 7 (Service Charges; Consultation Requirements; whether freeholder and/or intermediate landlord obliged to consult sub-tenants); and Saunders v Al-Himaly [2017] EWHC 2219 (Ch) (Joint venture; proprietary estoppel; unjust enrichment).

 

Michael Walsh’s practice encompasses all aspects of the law of property, with a particular emphasis on real property.  He has significant experience of commercial and contractual disputes across a variety of sectors, including financial services, leisure, hospitality and industry.

He has significant experience of acting for developers of land in relation to restrictive covenants, easements, land registration, securities and matters relating to mixed-use developments.  He has advised developers both before and after acquisition of land on the enforceability of anti-competitive restrictive covenants. Michael has extensive experience of damages claims in the context of development work and unlawful interference with neighbouring property rights.

Michael also frequently deals with cases where valuable commercial and residential land is being occupied by protesters or trespassers ahead of being redeveloped.  He regularly obtains urgent possession orders in the High Court against protesters and other trespassers, who are occupying valuable or high-profile land.

In 2016 he was appointed as Junior Counsel to the Crown on the B Panel.

Michael is ranked by both Chambers & Partners and Legal 500 as a leading junior in real estate.  Chambers & Partners UK Bar Guide 2017 praises Michael’s extensive experience of seeking urgent injunctions and possession orders in high profile cases, saying “he rose to the challenge at short notice and got a fantastic result for our client.” The 2018 Guide says he is “clear-thinking, responsive, personable and efficient. He offers practical advice and he is good on his feet.”

 

 

 

Introduction

 

  1. This seminar examines the various issues that present property litigators in rooftop developments. It is written from a property perspective and does not deal with the issues that can be encountered from a planning, construction or tax perspective, although aspects of those topics may be dealt with in passing in the seminar.

 

  1. We have produced a checklist at the back of this paper, which we hope will be a useful tool for determining whether you have addressed the main issues that can arise when a client is thinking about, or has carried out, a rooftop development.

 

  1. These notes are the legal framework that will underpin the content of the seminar but that we will not have time to deliver in detail. Nor are these notes a comprehensive statement of every issue that will arise on a rooftop development.

 

  1. We will look at the following four stages of a rooftop development:

 

  • Feasibility;
  • Planning the Development;
  • Implementation; and
  • Disposal and Management

 

 Stage 1 – Feasibility

 

  1. Development on top of an existing building may not always be possible or viable. There are many technical issues to consider, such as whether the existing building has sufficient structural strength; sufficient servicing capacities; and a means of escape to comply with building regulations.  There are also planning, finance and tax issues.  This section will focus on the potential legal obstacles to rooftop development at the feasibility stage of development.

 

Ownership of the roof and airspace

 

  1. Before one gets embroiled in the more prosaic legal issues thrown up by a proposed rooftop development it is first necessary to check the obvious: who owns the roof and the airspace.

 

  1. Where the building contains flats, the obvious starting place is the lease of the top floor flat(s). More often than not, the ownership will be clear from the parcels clause and the repairing obligations.  In a block of flats, one would expect the roof to be retained by the landlord.  It is a general rule that a freehold owner of land is presumed also to own the air space above its property.  In such circumstances, absent an express or implied prohibition, the owner is entitled to use its retained property as it pleases, even where that will be detrimental to the interest of his lessee: see Port v Griffith [1938] 1 All ER 295.  In Hannon v 169 Queen’s Gate Ltd [2000] 1 EGLR 40 Mr Bernard Livesey QC explained the position as follows at [6]:

 

 

In determining this case it is necessary to start from the proposition that prima facie a landlord is entitled to use its retained property as it pleases, even where that will be detrimental to the interest of his lessee…The claimant has not sought to contradict, limit or distinguish this proposition. Since it is accepted that the defendant’s retained property includes the roof space and roof surface, it will have a prima facie entitlement to pursue the proposed development as planned. A lessee will generally be able to prevent a landlord acting in pursuance of such entitlement only where there is some express or implied covenant in the lease which will enable him to so do…

 

Breach of the landlord’s covenant to repair the roof?

 

  1. Where the roof is retained by the landlord, it is likely that he will have covenanted to maintain and repair the same. In Devonshire Reid Properties v Trenaman [1997] 1 EGLR 45 (Lands Tribunal), a building comprised four flats which had been let on long leases. The lessor had retained the roof and roof space of the building and had obtained planning permission to develop the roof and roof space by the construction of a fifth flat.  The question arose before the Lands Tribunal whether the lessor was entitled, having regard to the terms of the leases of the existing four flats, to carry out that development.  The Tribunal held that the construction of a fifth flat would place the lessor in breach of its obligation to repair the roof.  The decision relied on Grange v Lockwood (1860) 2 F&F 115 in which it was stated that “A covenant to repair, uphold and maintain or keep in good repair raises a duty not to destroy the demised premises and the pulling them down, wholly or partly, is a breach of such covenant”.

 

  1. In Hannon v 169 Queen’s Gate Limited, 25 October 1999 (Ch D), a purpose-built block contained 25 flats which had been let on long leases. The lessor had retained the roof and roof space of the building.  The lessor wished to construct two further flats on the roof. A lessee contended that such work would involve a breach of the lessor’s obligation to repair the roof.  This contention was rejected and Devonshire was not followed on that point.  Mr Livesey QC (sitting as a Deputy Judge of the High Court) said at [18]: “It strikes me that the logic behind such a principle [not to destroy] is suspect and the principle is faintly absurd nowadays”.  In any event, on the basis of first principle whether the implied duty not to destroy is absolute must depend on the construction of the lease.  Not every alteration of the premises amounts to a breach of the covenant to repair.  In Hannon there was no other provision in the lease which pointed towards limiting development and in fact there was an express term from which development seemed to be permitted.

 

  1. The lessee also contended that the court should imply into the leases a covenant by the lessor not to construct any more residential flats in or upon the building at roof level. It was accepted that there was a letting scheme in relation to the lessee’s covenants. There was argument as to whether the geographical extent of the letting scheme would include the two new flats and the court held that it would.  Thus, the lessees of the two new flats would be bound by the scheme.  This distinguished the case from Devonshire Reid.

 

  1. Further, the service charge provisions provided for the lessees to pay a fair proportion of the relevant expenses and outgoings so that the presence of two further lessees, obliged to contribute to the service charge, would prima facie reduce rather than increase the burden on any one lessee.

 

  1. The court made a number of additional points: first, a reference in the leases to the fact that the building was divided into flats did not suggest that the lessor could not change the number of those flats, for example, by sub-dividing or aggregating the flats, whereas in Devonshire Reid, the leases referred to there being four flats; secondly, an express term of the lease contemplated that the lessor could alter and add to the building; thirdly, the lessees at the relevant time were the sole shareholders in the lessor company and it was not obvious that the lessees would have rejected a proposal for the lessor company to make a development profit from the addition of two further flats. It had also been submitted by the lessee that the addition of two flats to the letting scheme would be undesirable as it would expose each lessee to a liability to an additional two lessees. On this point, the court did not think that the overall burden on lessees would be increased by the addition of two flats.

 

The letting scheme argument

 

  1. Morgan J considered both cases in H Waites Ltd v Hambledon Court Ltd[2014] EWHC 651 (Ch). Hambledon Court comprises a block of flats and two garage blocks.  The leases required each lessee to pay 1/12 of the cost of insurance and services.  The freeholder granted a lease of the airspace above the garages.  The Claimant was a developer and the lessee under that lease.  It intended to construct a flat on each of the garage blocks.  The lessees of the flats opposed the development.  The lessees argued that the flat and garage leases created a letting scheme in relation to the negative covenants by the lessees.  It was then said that it was necessary to give effect to the letting scheme, and for other reasons, to imply into the flat and garage leases a covenant by the lessor not to construct further flats on the estate.

 

  1. At [58] – [60] Morgan J concluded:

 

“58 I consider that the language of the leases clearly creates a scheme of covenants.  There is no difficulty about the geographical extent of the scheme.  The scheme applies to the Estate and that includes the airspace above the garage blocks.  The scheme binds the lessor in relation to parts of the scheme which are not the subject of leases.  As and when leases of those parts are later granted those lessees will be bound by the scheme: see Megarry & Wade, the Law of Real Property, 8th ed., para.  32.076 and Brunner v Greenslade [1971] Ch 993.  There is also little difficulty about the covenants which are the subject of the scheme.  The relevant covenants are those set out in the Second Sch  to the flat and garage lease and, probably, the negative covenants in clause 4(7) and (8) of that lease.  It is not suggested that there is an express covenant which binds the lessor from constructing additional flats.  In particular it is not said that the covenant in clause 4(7) against structural alterations without the lessor’s consent can be turned around so that it requires the lessor to get the lessees’ consent.

 

59 As a result of the conclusions in the last paragraph, it is not necessary to imply a term restricting the number of flats in order to preserve the integrity of the letting scheme.  Also, I am not impressed by the argument put forward in Hannon that a restriction on the number of flats should be implied in order to prevent any one lessee being liable to more than the original number of lessees.

 

60 It follows from the above that the fact that the flat and garage leases impose a scheme of covenants does not justify the court in implying a restriction on the number of flats which may be constructed.”

 

Interference with tenant’s rights/easements

 

  1. The leases will almost certainly grant the lessees rights in respect of common service media, e.g. drains pipes gullies ducts mains channels wires cables conduits flues and other conducting media. It is important to understand if the proposed development requires any common service media to be moved or disturbed and for solutions to be found so as to avoid the development causing substantial interference with the tenant’s rights.

 

Breach of the covenant for quiet enjoyment/non-derogation from grant

 

  1. There is little if any difference between the scope of the covenant for quiet enjoyment and that of the obligation not to derogate from grant. The principle is the same in each case: a man may not give with one hand and take away with the other. The covenant for quiet enjoyment is broken if the landlord does anything that substantially interferes with the tenant’s title to or possession of the demised premises or with his ordinary and lawful enjoyment of them.  A breach or anticipatory breach of this covenant may entitle a tenant to an injunction preventing the development.

 

  1. It is not confined to cases of direct and physical injury to land: see Southwark LBC v Mills [1999] 3 W.L.R. 939. In that case Lord Hoffman acknowledged that excessive noise caused by the occupier of a new flat erected in the airspace above a roof would, in circumstances where the new flat was not contemplated at the commencement of the lease, in principle constitute a substantial interference with the possession or ordinary enjoyment of the flat below and a breach of the covenant for quiet enjoyment.

 

  1. In Francia Properties Ltd v Aristou & Ors [2017] L. & T.R. 5 (there is a fuller summary, below) the tenants of the existing top floor flat argued that the addition of a new flat on the roof would restrict sunlight to their terrace so as to constitute a breach of the covenant for quiet enjoyment. The judge accepted that restriction on sunlight is capable of giving rise to breach of the covenant but found as a fact that sunlight to the tenants’ terrace would not be restricted by the proposed development to such an extent that it would render the flat “materially” or “substantially” less fit for the purpose for which it was let.

 

Clauses permitting development

 

  1. Many leases include a clause permitting development. For example, a lease may except and reserve to the landlord: “A right to build upon and to maintain repair replace and renew any other part or parts of the Building and upon any adjoining land or buildings of the landlord in such manner as the landlord may think fit provided in the case of the Building that reasonable means of access to the [demised premises] is available at all times.”

 

  1. The effect of such clauses is a matter of construction in each case but the court will lean against a construction which would entitle the servient owner to deprive the dominant tenement of all access of light and air or the whole benefit of any other easement such as a right of access.

 

  1. Such a provision may, however, permit acts which would otherwise amount to an unjustified obstruction to or interference with an easement and would otherwise be an actionable nuisance but not acts which would for practical purposes destroy the easement. In that case the servient owner can obstruct or interfere with a dominant owner’s rights, provided the dominant owner is left with reasonable enjoyment of them, though not necessarily in so convenient a manner or to such an extent as at the date of grant.

 

  1. In Francia Properties Ltd v Aristou & Ors, the Flat was demised subject to the lessor’s rights set out in the Fifth Schedule. Paragraph 4 of that Schedule reserved:

 

The right for the Landlord at any time or times hereafter without obtaining the consent of or paying compensation to the Tenant:

4.1 To build or rebuild or alter permit or suffer to be built or rebuilt or altered any buildings or erections upon the Development (other than the Building) according to such plans and to such height extent or otherwise and in such manner as the Landlord shall reasonably think fit notwithstanding that such buildings as so built rebuilt or altered may obstruct any lights windows or other openings in or on the Demised Premises [the Flat].” (Emphasis added.)

 

  1. The court rejected the tenants’ submission that the words in parenthesis meant that that no building, rebuilding or alteration work was permitted upon the Building. The commercial purpose of the clause, which is fairly standard in leases, was to act as a consent under s.3 of the Prescription Act 1832 and thereby prevent the tenant acquiring the right to light over the adjoining land of his own landlord, which would prevent the landlord from developing such land: see Nugee J in Century Projects Ltd v Almacantar (Centre Point) Ltd [2014] EWHC 394 (Ch) at [34]. In Francia, it was held that the provision was permissive rather than prohibitory.

 

Freehold covenants restricting development

 

  1. It is not uncommon for a freehold covenant to impose a height restriction otherwise than over a uniform horizontal plane. For example, in City of London v Intercede Ltd [2005] EWHC 1691 (Ch) a deed executed by the owners of the Royal Exchange and the Lloyds Building contained covenants authorizing the parties:

 

“at any time hereafter to raise their building … aforesaid or to erect any new building or buildings at any time hereafter on the site of their said building or on any part thereof to a height not exceeding the height indicated by the [colour] on the said drawing and in accordance therewith …”

 

  1. The drawing attached to the deed in that case specified the permitted heights and showed a ‘building line’ proceeding vertically from the ground to the base of the pediment and then at the specified angle to the top of the façade.

 

  1. It is common for covenants in more suburban areas to restrict building to a number of storeys.

 

  1. It will be necessary to consider whether a proposed development would breach any such freehold covenants; whether the covenant is enforceable and, if so, whether there are grounds for an application to discharge or modify the covenant under s.84(1) of the LPA 1925.

 

Rights of light/Party Wall Awards

 

  1. Nearby properties may benefit from rights of light that could prevent development and party wall awards may also be required. It is important to take expert advice at an early stage. Many of these issues can usually be resolved, but at a cost.  A summary of the procedure to be followed for Party Wall issues is set out in the next section.

 

The Landlord and Tenant Act 1987

 

  1. The detail of the 1987 Act will be addressed in sections 2, 3 and 4 of this talk. What is said there should be borne in mind when considering whether the proposed development is feasible.

 

Stages 2 and 3 – Planning the Development and Implementation

 

  1. In this stage we look at the following:

 

  • The road-blocks to development:
  • Disputes with lessees;
  • Right to Manage companies;
  • Collective enfranchisement;
  • Avoiding rights of first refusal under the 1987 Act;

 

  • Party Wall Act issues in rooftop developments

 

Managing Disputes with Lessees

 

  1. Rooftop developments are much easier to carry out with the cooperation of the existing tenants but that is not always possible. Often the owners of the existing top-floor flat will not want to have a development above them and they will do everything they can to prevent it.

 

  1. Developers may wish to consider making general improvements to the building, which will not be passed on through the service charge, to help sweeten the deal. This is easier to do if the developer is the landlord but if it is a third party there will need to be an agreement with the entity that manages the building (i.e. landlord, management company or RTM company).

 

  1. It is advisable to have in place a solid development plan before approaching the tenants. As will be explained in more detail in the next section, the landlord will want to ensure the planning is at an advanced stage before revealing its hand, in case the tenants exercise their right to collectively enfranchise.

 

  1. As we set out in greater detail, below, it is highly likely the developer will need to enter into party wall agreements with one or more of the lessees in the building. The number of agreements will vary from project to project but a general summary is given in this paper on the procedure to be followed and advice should always be sought from a suitably qualified surveyor and/or lawyer with expertise in this area.

 

  1. Failure to reach agreement with the lessees frequently results in litigation, whether that is proceedings for an injunction by the lessees who are attempting to stop a development that has commenced, or proceedings by a landlord seeking a declaration that it is entitled to carry out the development (this is what happened in Francia Properties v Aristou & Others [2017] L&TR 5, in which we were both Counsel). Ultimately, it will be a matter for each case as to whether the developer seeks a declaration before embarking upon the development but in cases where the landlord intends to grant a development lease or other right to develop the roof, there is little alternative to proceedings because the tenants will often write to the prospective purchaser to voice their objection, thereby scuppering any sale.

 

  1. Developers should always check, insofar as they can, that there is a history of compliance with the provisions of the Landlord and Tenant Act 1987 and the Leasehold Reform, Housing and Urban Development Act 1993. If a third-party developer purchases a long lease of the roof space before the development but there is a pre-existing breach of the 1987 Act or if the roof was deemed to be a common part within the meaning of the 1993 Act, a qualifying majority of the tenants of the building may be able to acquire the freehold reversion free of the developer’s interest.

 

Collective Enfranchisement

 

  1. The Leasehold Reform, Housing and Urban Development Act 1993 (the “1993 Act”) allows the leaseholders of a block to compulsorily purchase, through a nominee, the freehold of the block and thereby deprive the landlord of its asset altogether. The price to be paid for the block is determined in accordance with a valuation exercise that is prescribed with the Act. As is commonly the case with statutory valuations, the exercise is to be undertaken with reference to an open market sale but subject to certain assumptions. This seminar does not deal with those provisions in detail.

 

  1. The advantage to leaseholders in enfranchising is that they take over control of their block and thus can determine the fate of a roof development. However, in acquiring the block, the leaseholders will, in addition to acquiring the freehold to the flats also acquire the freehold of the commercial units (subject to the right of the freeholder to require a leaseback of the units). Whilst the value of these units may make the exercise of enfranchisement commercially unviable for the leaseholder (e.g. if they are let on short leases at a rack rent), nevertheless the right to acquire them (subject to the option of a leaseback) exists.

 

  1. A detailed analysis of the right is outside the scope of this seminar but the key issue to bear in mind when the landlord is developing the roof space is that it will want to extract development value from the qualifying tenants, if they decide to collectively enfranchise.

 

  1. Section 32 and Schedule 6 of the 1993 Act make provisions for the purchase price payable by the nominee purchaser on a collective enfranchisement.

 

  1. The date upon which the qualifying tenants serve their notice of claim under section 13 of the 1993 Act is the ‘valuation date’ and the date on which the premium to be paid is valued. If the landlord is to be prevented from carrying out the development, it will want to extract the maximum value from the qualifying tenants under the provisions of the 1993 Act. The development value in the premium paid by the nominee purchaser is the sum the hypothetical purchaser would pay on the valuation date for the right to develop the roof.

 

  1. In Earl Cadogan v 2 Herbert Crescent Freehold Limited LRA/97&108/2006 (unreported), where the Upper Tribunal identified the approach of the hypothetical purchaser to the question of the development value attributable to the subject property on the valuation date as follows:

 

“On taking such advice as at the valuation date hypothetical purchasers of the freeholder’s interest could be given a range of advice upon the potential legal problems from the ultra cautious to the over optimistic. Clearly a hypothetical purchaser who received ultra cautious advice and acted upon it would be unlikely to be the person who made the highest bid for the freeholder’s interest and therefore would not be the successful purchaser. We conclude therefore that we should not assess the value of the freeholder’s interest under Schedule 6 paragraph 3 on the basis that the successful hypothetical purchaser would receive ultra cautious advice. However we conclude that we must assume that this successful hypothetical purchaser would receive sound and responsible advice rather than over optimistic advice.”

 

  1. In 31 Cadogan Square Freehold Limited & Another v The Earl Cadogan [2010] UKUT 321 (LC), the Upper Tribunal followed this approach and added at [145]:

 

“The hypothetical purchaser, who must be assumed to act prudently, would take advice regarding the planning position. Such advice would not be ultra cautious but would not be overly optimistic. Also we conclude that the hypothetical purchaser would himself (or, more likely, through his planning advisor) make enquiry of [the local planning authority] so as to obtain guidance (albeit informal and non-binding) as to the likely attitude [the local planning authority] would take to the proposed works. The advisor should be assumed to be experienced in planning issues in [the local area] and would consider the development plan and would research (or already be aware of) recent relevant planning decisions.”

 

  1. During the feasibility, planning and design stage of the development, the landlord ought to take the following basic steps to ensure there is sufficiently strong evidence that a development was possible.

 

  • Instruct an architect to put together detailed drawings for the purposes of a planning application at the earliest opportunity.
  • Instruct a planning consultant to report on the likelihood of the development being approved. It is important that this report comments directly on the scope of the proposed development and gives an expert opinion on the prospect of it being granted by the local planning authority.
  • Seek pre-application planning advice from the local authority’s planning officer on the proposed development, if possible. If the advice is negative, make changes to the proposed development and re-submit for a positive decision.

 

  1. Taking these early steps will ensure there is available evidence, should there be a dispute about the amount of development payable by the nominee purchaser. In the absence of solid contemporaneous evidence about the viability of the proposed development it is much easier for the qualifying tenants to argue that any prospect of development is remote and warrants only a nominal payment in compensation to the landlord, if indeed anything.

 

  1. In opening paragraphs of this section, we said it was important to ensure the landlord had adequate evidence of the value of the rooftop development before approaching the lessees of the building about the detail and practicalities of carrying out the development. Clearly, the steps set out in paragraph 44 are ones that can be done before the formal application for planning permission, after which the lessees will be aware of the plans to develop and may try to stop it by enfranchising.

 

Rights of First Refusal

 

  1. If the landlord is going to dispose of the rooftop on a development lease, it must give serious consideration to whether that disposal would be a ‘relevant disposal’ within the meaning of the Landlord and Tenant Act 1987 (the “1987 Act”). If it is a relevant disposal then it must give the right of first refusal to any qualifying tenants of the building. This is a very tricky area and one that is fraught with technical difficulties.  The following is a summary that will assist assessing whether the disposal will be caught by the Act.

 

What is Part 1 of the Landlord and Tenant Act 1987?

 

  1. The Act requires the landlord of a building containing flats and to which the Act applies to serve notice on the qualifying tenants of that building before entering into a contract to make a “relevant disposal”. This allows the qualifying tenants to have the right of first refusal before the landlord sells the interest.

 

When does the Act apply?

 

  1. Part 1 of the Landlord and Tenant Act 1987 applies to premises if they consist of the whole or part of a building, they contain two or more flats held by qualifying tenants and the number of such flats exceeds 50% of the total number of flats contained in the premises.

 

When does the Act not apply?

 

  1. The Act does not apply where:

 

  • any part or parts of the premises is or are occupied or intended to be occupied otherwise than for residential purposes; and
  • the internal floor area of that part or those parts (taken together) exceeds 50 per cent. of the internal floor area of the premises (taken as a whole);
  • and for the purposes of this subsection the internal floor area of any common parts shall be disregarded.

 

Note the difference between 50% here and 25% in the similar provisions of the 1993 Act.

 

What is a ‘relevant disposal’?

 

  1. A ‘relevant disposal’ refers to the disposal by the landlord of any estate or interest (whether legal or equitable) in any premises to which the Act applies, including the disposal of any such estate or interest in any common parts of the Disposal includes the surrender of a tenancy and the grant of an option or right of pre-emption. The most obvious disposal would be the sale of the freehold but the grant of a number of lesser interests such as a lease of the common parts would also be caught. The grant of any tenancy under which the demised premises consist of a single flat is an exception and is not caught by the Act.

 

Who is the landlord?

 

  1. The landlord for the purposes of the Act is (subject to some exceptions, such as an intermediate tenant with an interest of less than 7 years is not the landlord but a mortgagee in possession is the landlord) the person in relation to the premises consisting of the whole or part of a building who is the immediate landlord of the qualifying tenants of the flats contained in those premises.

 

Who is a qualifying tenant?

 

  1. A qualifying tenant is a tenant of a flat. The term is much wider than for instance the 1993 Act as there is no requirement for the tenancy to be a “long” tenancy. The term includes sub-tenants and persons holding under an agreement for lease. It also includes a Rent Act 1977 statutory tenant but not an assured tenant, which is a specific exclusion. However, a tenant whose landlord is a qualifying tenant of the flat cannot be a qualifying tenant himself. There can only be one qualifying tenant per flat. If a person is a tenant of 3 or more flats then he ceases to be the qualifying tenant of any of them.

 

What is the effect of the notice?

 

  1. The notice served by the landlord must contain particulars of the principal terms of the disposal by the landlord and must state that the notice constitutes an offer by the landlord to enter into a contract on those terms, which may be accepted by the requisite majority (greater than 50%) of the qualifying tenants of the constituent flats.

 

What if no notice is served and the landlord makes a relevant disposal?

 

  1. The landlord may commit a criminal offence. The tenants may seek to take the benefit of the transaction by serving on the landlord and/or the purchaser (depending on the circumstances) a s12A/12B/12C notice.

 

  1. Section 12B of the 1987 Act provides qualifying tenants with the right to compel a sale by the purchaser in relation to certain disposals where the tenants have a statutory right of first refusal.

 

  1. Section 12B provides as follows:

 

“(1) This section applies where—

(a) the original disposal consisted of entering into a contract and no notice has been served under section 12A (right of qualifying tenants to take benefit of contract), or

(b) the original disposal did not consist of entering into a contract.

(2) The requisite majority of qualifying tenants of the constituent flats may serve a notice (a “purchase notice”) on the purchaser requiring him to dispose of the estate or interest that was the subject-matter of the original disposal, on the terms on which it was made (including those relating to the consideration payable), to a person or persons nominated for the purposes of this section by any such majority of qualifying tenants of those flats.”

 

Avoidance and Exceptions

 

  1. It is not possible to contract out of the Act. However, is possible structure the transaction so that the Act does not apply. It is much easier to do this before the leases of the flats in the building are granted (not the scenario we are looking at in this seminar) or before a rooftop development has commenced. This is why it is important for a landlord to take expert advice on how to structure the transaction because seemingly small technical errors can have disastrous consequences.

 

  1. The first question to ask is whether it is worth avoiding the Act? If you are the landlord, and you are selling your interest in the roof to a developer who will build out the flats, does it really matter whether a developer buys it to build out or the tenants buy it to prevent development?

 

  1. Common disposals, that are relevant to rooftop developments, that are excluded from being relevant disposals under the 1987 Act are:

 

  • The grant of a tenancy of a single flat (section 4(1)(a)); and
  • A disposal to an associated company. There is a three-step procedure for avoidance using this mechanism: (i) the creation of the associated company; (ii) the transfer of the land to the associated company; and (iii) the transfer of the shares in the associated company to the purchaser.  It is crucial that the property transfer takes effect before the share transfer.  To satisfy the definition of an ‘associated company’, it must be another body corporate which is (within the meaning of s 1159 of the Companies Act 2006) that body’s holding company, a subsidiary of that body or another subsidiary of that body’s holding company.

 

The Right to Manage

 

  1. The Commonhold and Leasehold Reform Act 2002 (the “2002 Act”) makes provision for qualifying tenants of a block of flats to manage their own building, without the need to purchase the freehold under the provisions of the 1993 Act. A detailed analysis of how the Right to Manage is acquired is outside the scope of this seminar but it is helpful to look first at two sections from the 2002 Act.

 

  1. Section 96 of the 2002 Act provides as follows:

 

“(1) This section and section 97 apply in relation to management functions relating to the whole or any part of the premises.

(2) Management functions which a person who is landlord under a lease of the whole or any part of the premises has under the lease are instead functions of the RTM company.

(3) And where a person is party to a lease of the whole or any part of the premises otherwise than as landlord or tenant, management functions of his under the lease are also instead functions of the RTM company.

(4) Accordingly, any provisions of the lease making provision about the relationship of—

(a) a person who is landlord under the lease, and

(b) a person who is party to the lease otherwise than as landlord or tenant,

in relation to such functions do not have effect.

(5) “Management functions” are functions with respect to services, repairs, maintenance, improvements, insurance and management.

(6) But this section does not apply in relation to—

(a) functions with respect to a matter concerning only a part of the premises consisting of a flat or other unit not held under a lease by a qualifying tenant, or

(b) functions relating to re-entry or forfeiture.

(7) An order amending subsection (5) or (6) may be made by the appropriate national authority.”

 

  1. Section 97 provides as follows:

 

(1) Any obligation owed by the RTM company by virtue of section 96 to a tenant under a lease of the whole or any part of the premises is also owed to each person who is landlord under the lease.

(2) A person who is—

(a) landlord under a lease of the whole or any part of the premises,

(b) party to such a lease otherwise than as landlord or tenant, or

(c) a manager appointed under Part 2 of the 1987 Act to act in relation to the premises, or any premises containing or contained in the premises,

is not entitled to do anything which the RTM company is required or empowered to do under the lease by virtue of section 96, except in accordance with an agreement made by him and the RTM company.

(3) But subsection (2) does not prevent any person from insuring the whole or any part of the premises at his own expense.

(4) So far as any function of a tenant under a lease of the whole or any part of the premises—

(a) relates to the exercise of any function under the lease which is a function of the RTM company by virtue of section 96, and

(b) is exercisable in relation to a person who is landlord under the lease or party to the lease otherwise than as landlord or tenant,

it is instead exercisable in relation to the RTM company.

(5) But subsection (4) does not require or permit the payment to the RTM company of so much of any service charges payable by a tenant under a lease of the whole or any part of the premises as is required to meet costs incurred before the right to manage was acquired by the RTM company in connection with matters for which the service charges are payable.

 

  1. One of the issues that may arise on a rooftop development is whether the Right to Manage interferes with a landlord’s right to develop, assuming it is retained land and is not demised to any of the tenants. In Francia Properties v Aristou & Others [2017] L&TR 5, the Claimant landlord sought a declaration that it was entitled to construct a new flat on the roof space of a building. The building was a purpose-built block of eight flats. The claim was opposed by the tenants, who held a 125-year lease of the top floor flat, and the RTM company, which managed the building. The tenants contended, firstly, that the construction was precluded by para.4.1 of the Fifth Schedule to the lease, which provided that the flat was demised subject to the landlord’s right “to build … any buildings or erections upon the Development (other than the Building) … notwithstanding that such buildings as so built … may obstruct any lights windows or other openings in or on the Demised Premises”; the tenants relied in particular on the words in parentheses. The tenants contended, secondly, that the construction of the new flat would amount to a breach of the covenants for quiet enjoyment and/or derogation from grant by reason of restricting the amount of direct sunlight received by an L-shaped roof terrace demised with their flat. The RTM company argued that the construction of the new flat would unlawfully interfere with the management functions exercisable by it.

 

  1. The Court gave judgment for the landlord on each of the three points and granted the declarations sought. In relation to the RTM point, the Court held that the RTM company had management functions under sections 96 and 97 of the 2002 Act in respect of the roof, including keeping it in good repair, which would suffer a degree of interference by the construction of the new flat. However, Parliament had not intended by the 2002 Act to compromise the landlord’s property rights, particularly in the absence of compensation. If acquisition of the right to manage by an RTM company precluded a landlord from developing its own property, that would in many cases very likely cause a significant diminution in the value of that property. The tension is to be reconciled by permitting a landlord to carry out development works providing it has taken all reasonable steps to minimise the disturbance to the management functions of the RTM company during and after the works. This is supported by the assessment of proportionality required by Article 1, Protocol 1 of the European Convention on Human Rights.

 

  1. Although this is only a County Court case, it is the only reported decision on this point. The Recorder gave permission to appeal to the Court of Appeal to the RTM Company under the ‘leapfrog’ provisions in the CPR but the appeal was withdrawn shortly before the hearing was due to take place. For now, there are no more authoritative decisions.

 

Party Wall Issues

 

  1. When developing a roof space, it is likely that the developer will need to enter into party wall agreements with the owners of other flats in the building. There are two questions to consider when deciding whether the Party Wall etc. Act 1996 is engaged:

 

  • Is the wall or structure a party wall or other structure within the meaning of the 1996 Act?
  • Is the work proposed caught by the Act?

 

  1. A ‘party wall’ is defined by the 1996 Act in section 20 as:

 

“(a) a wall which forms part of a building and stands on lands of different owners to a greater extent than the projection of any artificially formed support on which the wall rests; and

(b) so much of a wall not being a wall referred to in paragraph (a) above as separates buildings belonging to different owners.”

 

 

 

 

  1. A ‘party structure’ is defined in section 20 as:

 

“a party wall and also a floor partition or other structure separating buildings or parts of buildings approached solely by separate staircases or separate entrances”.

 

  1. This translates the concept of party wall from the vertical dimension to the horizontal, and also the realm of parts of buildings approached by separate staircases or entrances (e.g. flats).

 

  1. The definition, “floor partition or other structure” would include ceilings, floors, joists, structural steels etc.. This wider definition captures horizontal (as well as vertical) partitions between flats or offices within the ambit of the 1996 Act.

 

  1. Section 2 contains the substance of the Act. Its provisions define the majority of works, which are permitted by the Act, and which would otherwise constitute trespass by the building owner at common law.

 

  1. In addition, the section also operates to qualify the building owner’s existing common law rights in certain respects. Where section 2(2) lists the building owner’s existing common law rights, this effectively imposes a requirement on the building owner to serve notice prior to carrying out such work. Prior to the Act, the building owner would have enjoyed such a right without the need to serve a notice.

 

  1. At the outset, you should note that notice under section 3 must be served by the building owner prior to the lawful exercise of rights under section 2.

 

Application of section 2

 

  1. Section 2(1) says that the walls to which the Act applies are to all party fence walls and all party walls. But it also applies to walls whose foundations straddle the boundary line, even when the main body of the wall remains on one owner’s land:

 

“This section applies where lands of different owners adjoin and at the line of junction the said lands are built on or a boundary wall, being a party fence wall or the external wall of a building, has been erected.”

 

  1. Section 2 will apply to rooftop development and the following is a summary of how the procedure operates in relation to a roof development, up to the point of a dispute.

Procedure: an overview

  1. The procedure under section 2 can be broken down into the following four stages:

 

  • Notice (or prior explicit written consent from the adjoining owner)
  • Counter-notice
  • Deemed dispute
  • Award

 

Pre-notice

 

  1. Before the notice is served, a building owner would need to consider:

 

  • Whether his works engage the Act. If in doubt, consult a surveyor or lawyer.  If the Act is engaged, appoint a suitably qualified surveyor, who will be able to advise and also assist with the preparation of and service of the notice.
  • Particulars of the proposed work are to be given in the notice and, depending on the complexity of the scheme of works, it may be necessary to provide plans, drawings, structural calculations etc. at an early stage if not with or at about the time of serving the notice.

 

Notice

 

  1. Where the Act is engaged, and notice is required, it determines whether the building owner’s works are to be carried out lawfully (i.e. authorised by the Act) or unlawfully. Before any of the rights set out in section 2(2) can be exercised, a party structure notice under section 3 must be served on any adjoining owner.

 

  1. Sections 3(1) and (2) state that a notice must:

 

  • be served at least 2 months before the date on which the proposed work will begin;
  • state the name and address of the building owner;
  • state the nature and particulars of the proposed work including, in cases where the building owner proposes to construct special foundations, plans, sections and details of construction of the special foundations together with reasonable particulars of the loads to be carried thereby; and
  • the date on which the proposed work will begin.

 

  1. A notice ceases to have effect if the work to which it relates has not begun within the period of 12 months beginning with the day on which the notice is served, and the work is not prosecuted with due diligence (see s.3(2)).

 

  1. There are two situations where notice need not be served before carrying out notifiable works:

 

  • where the adjoining owner has consented in writing to the carrying out of such works. Oral consent is not sufficient (see Seeff v Ho [2011] EWCA Civ 186).
  • where the building owner has to carry out such work to comply with a statutory notice served in relation to “dangerous or neglected structures” (see ss.3(3)(a) and (b)).

 

Counter-notice (s.4)

 

  1. The adjoining owner may serve a counter-notice:

 

  • setting out “a requirement that the building owner build in or on the wall or structure to which the notice relates such chimney copings, breasts, jambs or flues, or such piers or recesses or other like works, as may reasonably be required for the convenience of the adjoining owner”. The adjoining owner will be obliged to pay for the works he requires the building owner to carry out by such a counter-notice (see Section 11(9)); or

 

  • where the building owner has proposed special foundations (and the adjoining owner has agreed to the same), requiring that the special foundations be placed at a specified greater depth than that proposed by the building owner, or be constructed to a greater strength than that proposed, in order to accommodate any intended building by the adjoining owner (s.4(1)(b)). Again, the Act requires the adjoining owner to pay for the additional specifications to the special foundations (s.11(9), but note that an adjoining owner may require that the building owner carry out such additional works as a condition of granting consent to the special foundations in the first place).

 

  1. Any counter-notice must:

 

  • be served within one month of the day on which the party structure notice is served; and
  • specify the works the adjoining owner requires to be executed and must be accompanied by plans, sections and particulars of those works (s.4(2)).

 

  1. The effect of serving a counter-notice is to place the building owner under an obligation to carry out the works specified in the counter-notice, unless:

 

  • they would be injurious to him;
  • they would cause unnecessary inconvenience to him; or
  • they would cause unnecessary delay in the execution of the works set out in his original party structure notice (s.4(3)).

 

Deemed dispute under section 5

 

  1. If consent to a party structure notice has not been obtained within 14 days beginning with the day of its service, the adjoining owner is deemed to have dissented to the party structure notice.

 

  1. In those circumstances a dispute is also deemed to have arisen between the building owner and adjoining owner, and the dispute resolution mechanism under section 10 comes immediately into play.

 

Stage 4 – Disposal and Management

 

  1. The developer’s profit is usually only realised when the development is sold. Disposal is therefore of critical importance. The Landlord and Tenant Act 1987 may apply and the developer will need to consider whether the qualifying tenants have a right of first refusal.

 

  1. In nearly all cases the grant of a development lease of the roof and/or the airspace would be caught by the Act. In Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] 2 P. & C.R. 3 the landlord of the property granted a lease which included, inter alia, the airspace about the roof. The purpose of the grant of the lease was to facilitate the development of the roof space by the construction of a number of flats.  The tenants had no rights under their leases to access the roof but were opposed to any such development.  The issue was the extent to which the tenants could invoke the 1987 Act to acquire the subject matter of the demise or at least part of it.  One of the issues was whether the airspace above the flat roof and the mansard roof formed part of the building.

 

  1. Warren J held that the airspace, at least to the height of the chimneys, was an essential part of the space over which any owner of the building with repairing obligations would need to have adequate rights of access. It was a perfectly legitimate meaning of the word “building” in s.1(2) of the 1987 Act that it included the airspace necessary to enable maintenance to be carried out. If that was wrong, the airspace above the roof to that height was a common part being part of the exterior of the building.  It made perfectly good sense to include the airspace above the roof as part of the exterior when the enjoyment of that space was from time to time necessary for the protection of the building, i.e. by repairing it.  The airspace was part of the common parts and, as such, a disposal of it would be a relevant disposal within s.1 of the 1987 Act.

 

  1. There are a number of ways of “avoiding” the Act. In reality, these avoidance measures amount to structuring the deal so that the transaction is not a relevant disposal for the purposes of s.4. As set out earlier, two common avoidance methods are the grant of a lease of a single flat or a disposal to an associated company.

 

The terms of the new leases

 

  1. Where the leases of flats in a building are in similar form, it will be easy to grant the new lease(s) on the same (or substantially similar) terms. Indeed, many leases include a landlord’s covenant not to grant leases other than on substantially the same terms. If not, the landlord may wish to take the opportunity to modernize the terms of the lease.  Care must be taken to ensure that any rights and obligations are consistent with those that already exist.

 

 

The service charge regime

 

  1. The aggregate of service charge contributions payable by tenants in a building should equal 100% of expenditure. The addition of flats to a building has the potential to cause significant difficulties in the operation of the service charge scheme.

 

  1. In H Waites Ltd v Hambledon Court Ltd[2014] EWHC 651 (Ch), as to what the lessees’ service charge contribution should be if further flats were constructed on the estate, Morgan J saw no difficulty in implying a term that the lessees of the original flats should be required to pay “a fair proportion” of the cost of insurance and services. As such, it was not necessary or appropriate to imply the more radical term that the lessor should be disabled from constructing further flats anywhere on the estate.

 

  1. Many leases include an express provision allowing the landlord to vary the contribution payable by the tenants in the event of an addition or alteration in the layout of the development. The exercise of a contractual discretion is constrained by an implied term that the decision-making process be lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose; and that the result is not so outrageous that no reasonable decision-maker could have reached: see Braganza v BP Shipping Ltd [2015] UKSC.

 

  1. A clause which gives the landlord power to vary the tenant’s service charge contribution is void by s.27A(6) of the Landlord and Tenant Act 1985 following the decisions in Windermere Marina Village Ltd v Wild [2014] UKUT 163 (LC); Gater v Wellington Real Estate Limited [2014] UKUT 0561 (LC); Oliver v Sheffield City Council [2017] EWCA Civ 225. Where a provision for determining an apportionment is rendered void by the operation of s.27A(6), and the parties cannot agree what is fair, the consequence is that the fair proportion falls to be determined by the tribunal. It is, however, not clear whether the tribunal has jurisdiction to exercise a contractual power to vary the apportionment on behalf of the landlord.

 

 

Development Checklist

 

Stage 1 – Feasibility

 

Has the developer considered instructing a planning consultant to advise on the feasibility of the proposed development? 
Is there a structural engineer’s report? 
Are there any covenants preventing development? 
Is the roof demised to any of the other tenants? 
Is the roof void (if any) a common part? 
Would the development substantially interfere with the tenant’s ordinary and lawful enjoyment of his flat? 

 

 

Stage 2 – Planning the Development

 

Consider whether a development lease ought to be granted of the roof space. 
Has the developer instructed an architect to produce detailed drawings? 
Consider instructing a structural engineer to provide a report on whether the building can take the weight of the development. 
Consider seeking pre-application advice from the local planning officer. 
Can the tenants of the building collectively enfranchise? 
Is the building managed by an RTM Company? 
Is the Party Wall Act engaged? 
Meet with the lessees in the building to present the plans. 
If the lessees are implacably opposed consider litigation options. 
How will the development be carried out without interfering with the tenant’s easements? 
Where will building materials be stored on the site? 

 

Stage 3 – Implementation

 

Consider who has the obligation to insure. 
Prevent unnecessary injunctions by ensuring there is a procedure for regularly checking the lessees’ easements are not being obstructed. 
Ensure all the Party Wall Act awards are in place.

Draft leases of new flats on the same or substantially the same terms as leases of existing flats





 

 

Stage 4 – Disposal and Management

 

Check whether the disposal is caught by the 1987 Act 
Do the service charge contributions in existing leases need to be                  varied? 

 

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