Collective Enfranchisement: Part 1-the cases

In a two part blog we highlight the recent cases on collective enfranchisement and look out for part 2 where we provide a sample checklist from Lexis®PSL Property providing a list of issues to consider when embarking on collective enfranchisement procedure under the Leasehold Reform, Housing and Urban Development Act 1993.

'Artificial' collective enfranchisement claim succeeds

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

In Westbrook, a scheme (a corporate and leasehold structure) set up specifically to take advantage of the collective enfranchisement legislation under the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993) succeeded. The High Court decided that such a scheme did not fall foul of the wording in the legislation. The challenge was made on the basis of the construction of the wording, not on policy grounds.

Other findings of the court included:

  • the special purpose vehicles (SPVs), in the corporate structure set up by Westbrook, were not 'associated companies'--they were not precluded from having qualifying tenancies on this basis
  • the freeholder was entitled to argue a point (that the building contained more than 25% of space occupied for non-residential purposes), even though it did not take that point in its counter-notice
  • the court gave a steer on the meaning of 'residential purpose' (though falling short of formulating a test)--the concept of 'home' or 'only residence' was not inherently built into the concept, nor did the need for such accommodation have to be for any fixed or minimum period
  • the tenants' initial notice was not ineffective on the basis it did not 'specify the proposed purchase price' within the meaning of the legislation. The court decided that the tenant's figure must be a genuine opening offer as opposed to a nominal figure. However, an offer could be a genuine opening offer without necessarily being within a valuation range. In order to be genuine, it had to be bona fide in the sense that it would be seen by any reasonable landlord as a real offer and not merely the insertion of numbers in a form. It did not have to be an offer which the tenant believes will be, or even may be, accepted
Joanna Bhatia, solicitor in the Lexis®PSL Property Team:

“The judgment will be welcomed by tenants looking to collectively enfranchise. The main takeaway is that the scheme, an artificial structure set up specifically to take advantage of the collective enfranchisement provisions of LRHUDA 1993, and designed to ensure it complied with the letter of the legislation, did not fall foul of the wording of LRHUDA 1993. The judgment is also useful in confirming a point for freeholders—they can take a point in court, even if it is not made in its counter-notice. Finally, the court gives a steer on the meaning of ‘residential purpose’ for the 25% test. It fell short of prescribing a specific test, but the remarks are a good indicator”

No retrospective amendment to collective enfranchisement notices

Wiggins v Regent Wealth [2014] EWCA Civ 1078

In Wiggins the leasehold structure of the property was fairly complex, with a headlease, a management lease and occupational underleases of the seven flats. There were also 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.

The Court of Appeal decided that an initial notice could not be amended to include leases granted after it was served. As the initial notice had not been registered, the new tenants took free of the enfranchisement claim.

Joanna Bhatia, solicitor in the Lexis®PSL Property Team

 “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.”

 

 

 

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