Freeholder's enfranchisement leaseback avoidance scheme succeeds

The Upper Tribunal (Lands Chamber) (UT) has decided a freeholder could circumvent the determination of the terms of the leasebacks by the leasehold valuation tribunal (LVT) by granting new leases of the same flats.

In Queensbridge Investments Limited v 61 Queensgate Freehold Limited [2014] UKUT 0437 (LC) eight qualifying tenants in a building of 11 flats served a collective enfranchisement notice on the freeholder requiring it to sell the freehold to the nominee purchaser it specified. The notice identified two of the remaining three flats as those where it was mandatory for the freeholder to take a leaseback on enfranchisement. The freeholder served a counter-notice accepting the proposals, but not agreeing the terms of the two leasebacks and confirming it required a leaseback of the third remaining flat. In fact, both parties were mistaken and all three leases fell into the category where it was optional for the landlord to take a leaseback, rather than mandatory.

The UT had to decide whether there should be leasebacks of the three flats or whether the nominee purchaser should acquire the freehold subject to and with the benefit of the leases granted by the freeholder.

The decision

The UT decided that the effect of the new leases, which were held by qualifying tenants, was that no leasebacks of the three flats could be insisted on by either party when the acquisition of the freehold was completed as the new leases were now held by qualifying tenants.

The UT saw the force of the nominee purchaser's complaint that the freeholder had engineered circumstances in which the three flats were held by qualifying tenants in order to evade the consequences of the LVT's decision on the terms of the leasebacks. However, Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993) does not prevent the freeholder from selling or renting units during the period while the claim is in force. It only prohibited dispositions severing the freehold or the grant of leases which would have been liable to acquisition.

Lessons to be learned

This is the second decision in recent times adhering to the letter of the collective enfranchisement legislation. Here, the freeholder was able to engineer a situation to avoid leasebacks on unfavourable terms. In Westbrook Dolphin Square v Friends Life [2014] EWHC 2433 (Ch) the High Court decided that an 'artificial' scheme set up specifically to take advantage of the collective enfranchisement legislation in the first place succeeded—it did not fall foul of the wording of the legislation.

One case is a victory for the freeholder, the other for the nominee purchaser. In Westbrook, Mr Justice Mann pointed out that the freeholder's argument was based on statutory interpretation, not public policy (though not all policy challenges succeed). Here, the nominee purchaser did argue that the grant of the new leases was 'an abuse of the enfranchisement process'.

The takeaway for lawyers is that the court and tribunals are adhering to the strict letter of the law in collective enfranchisement cases—whomever this may benefit in each case.

This article was first published in LexisPSL Property on 10 October 2014. Click here for a free one week trial of Lexis®PSL Property

Filed Under: Property

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