Collective enfranchisement notice cannot be amended to include subsequently granted leases - register initial notices as estate contracts

In Wiggins v Regent Wealth  [2014] EWCA Civ 1078 the Court of Appeal decided that an initial notice could not be amended to include leases granted after it was served.

What were the facts of the case?

The leasehold structure of the property was fairly complex, with a headlease, a management lease, occupational underleases of the seven flats, overriding leases of those flats and an ‘enforcer lease’ above the management lease to allow enforcement of it despite the grant of the overriding leases. The initial notice specified all these leasehold interests as interests to be acquired, other than the occupational underleases.

The freeholder served a counter-notice admitting the participating tenants were entitled to exercise the right of collective enfranchisement.

The initial notice was not registered against the titles of the landlords of the overriding leases of the third, fourth and fifth floors (the old leases). Subsequently, the landlords of each of the old leases granted further long underleases (the new leases) which were registered at the Land Registry.

The solicitors for the landlords of the old leases claimed that the new leases were not liable to acquisition, and that, if the enfranchisement went ahead, the participating tenants would acquire the old leases subject to the new leases, but for a price which disregarded the existence of the new leases. They argued the participating tenants should pay nearly £7m for the old leases which now only gave the right to possession for 10 days in 2122.

The participating tenants asked the landlords to agree an amendment to the initial notice to include the new leases. They refused.

Subsequently the participating tenants acquired the freehold, headlease and the enforcer lease.

In the county court it was held that:

  • the participating tenants in a collective enfranchisement claim were permitted to amend the initial notice to specify additional intermediate leasehold interests – granted after service of the initial notice - as liable to acquisition
  • the tenants of these new leases did not take free of the initial notice and the collective enfranchisement claim

The immediate landlords of appealed this decision and the Court of Appeal allowed the appeal.

What is the law in this area?

Section 1 of the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993)  provides that subject to various qualifying criteria, tenants who hold long leases of flats have a collective right to buy the freehold (and any intermediate leasehold interests) of the building containing those flats together with any common areas (e.g. gardens, car parks etc.).

If the initial notice served by the participating tenants is registered against the relevant titles (taking effect as an estate contract), the landlords of any relevant leasehold interests cannot grant any lease which, if granted before the date of service of the initial notice, would have been liable to acquisition(LRHUDA 1993, ss 19, 97(1))

What did the Court of Appeal decide?

The Court of Appeal decided that:

  • the initial notice could not be amended to include the new leases
  • the tenants of those leases took free of the enfranchisement claim

It was clear from the express provisions of LRHUDA 1993, s 1, that the statutory intention was to confer the collective right on ‘qualifying tenants’ in relation to premises which, as at ‘the relevant date’ (the date on which the initial notice is given), satisfied the requirements stipulated in LRHUDA 1993. Every element of those requirements had to be tested as at the relevant date.

The whole statutory procedural machinery for the exercise of the collective right was also geared to the position as it exists as at the relevant date. The trigger dates and trigger conditions are all linked to the snapshot position as it stands as at the relevant date. The notice cannot specify a leasehold interest which does not yet exist.

There was no suggestion in the legislation that the freehold and leasehold interests to be acquired could be more extensive than specified in the initial notice, let alone that an existing claim could subsequently be extended to include additional premises or interests, not in existence as at the relevant date.

The new leases could not have been valued at all - since they did not exist at the relevant date they could not have been sold on the open market. There was nothing in the legislation supporting the concept that a later created leasehold interest was to be valued on the artificial, and false, hypothesis that it had been created earlier at some unknown date and was in existence on the relevant date (when market conditions may have been different).

The following conclusions could be drawn from the relevant statutory provisions and scheme of LRHUDA 1993:

  • although it was not appropriate to say leasehold interests subject to acquisition were ‘frozen’ at the relevant date - since there were clearly other provisions in the rest of LRHUDA 1993 that may entitle or require the taking account of subsequent events (e.g. as at the date of settling the conveyance) – the legislation did not, on its true construction, permit a right to collective enfranchisement to be exercised in relation to leasehold interests not in existence as at the relevant date.
  • the power in the legislation to amend an initial notice to include a leasehold interest which was not specified in the initial notice did not include a power to amend the notice to specify a leasehold interest which was not in existence at the relevant date
  • that conclusion was supported by the right to register the initial notice as an estate contract. If it is registered, any subsequent purported grant of a leasehold interest by a relevant landlord is void and no need for amendment of the notice arises. However, in the absence of registration, as here, the consequence is that, under Land Registration Act 2002, s 29 (which determines priority of interests and has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition), the tenants of the new leases (as registered disponees for valuable consideration) took free of the enfranchisement claim in the initial notice. That consequence, necessarily envisaged by section 97, was wholly inconsistent with the notion that, in circumstances where the nominee purchaser has failed to register its initial notice, the initial notice can somehow subsequently be amended to rectify the failure to register - and thereby, by the back door, subject the tenants of the new leases to the claim made by the initial notice

What are the lessons for lawyers?

The clear message is to ensure the initial notice is registered to avoid a situation like this. The participating tenants here can still acquire the new leases, but with a later valuation date the premium payable is likely to be higher(which was the commercial purpose of the appeal for the landlords in this case).

Filed Under: Property

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