Westbrook’s artificial collective enfranchisement scheme succeeds in High Court

Can a scheme set up specifically to take advantage of the collective enfranchisement legislation succeed? The High Court decided that such a scheme did not fall foul of the wording of the legislation.

Original news

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

In Westbrook, the then parent company of Westbrook was anxious to acquire the freehold of Dolphin Square. It created a number of companies and transactions, to bring into existence underleases whose tenants could invoke the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993). Westbrook, as nominee purchaser, served an initial notice on the landlord, Friends Provident, in September 2007. Friends Provident served a counter-notice and Westbrook made an application to court. However, it later discontinued the proceedings due to a fall in the residential property market since the service of the initial notice.

In May 2010 it served a second initial notice. Again, Friends Provident served a counter-notice, challenging the validity of the notice and Westbrook’s entitlement to purchase.

Westbrook then applied to the High Court for a declaration that it was entitled to acquire the freehold.

What did the court decide?

The court decided that all challenges to Westbrook’s enfranchisement application failed and that it was entitled to its declarations as to its entitlement to enfranchise and other relief.

What was the main issue in the case?

There were a number of challenges to Westbrooks’ entitlement to enfranchise, but the main one – of wider application - was whether it was prevented from enfranchising as it had created the scheme (the leasehold and corporate structure) to provide an opportunity for enfranchisement which would otherwise not exist. Friends Life argued that it was not the intention of Parliament to allow such schemes (because they would circumvent the apparent intention of the statute).

The High Court decided the SPVs were not disqualified from being participating tenants by interpreting LRHUDA 1993 against them. Friends Life could not look to Hansard to interpret the legislation. There was nothing ambiguous or obscure about the wording of LRHUDA 1993 and no words whose literal meaning would lead to absurdity.

The words to be interpreted were ‘tenant of a flat under a long lease’. There was no disputing that the literal wording of the section was complied with. Each of the SPVs was a tenant, each of them had a lease (two leases) of a flat and each lease was a long lease.

Friends Life’s argument was not so much an attempt to construe words in the statute, but to identify an underlying purpose and then find some words to which it could be attached as a matter of construction.

What were the other findings of note?

  • 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.
  • Friends Life was entitled to argue the 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 LRHUDA 1993. 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.

What are the lessons for lawyers?

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.

However, as Mr Justice Mann pointed out, Friends Life’s argument was based on statutory interpretation, not public policy (though not all policy challenges succeed). It will be interesting to see if Friends Life appeals on the latter basis. This must be likely, bearing in mind the value and significance of the transaction.

The outcome of any such appeal would be interesting – particularly in light of the amendments to Leasehold Reform Act  1967 Act (made by Commonhold and Leasehold Reform Act 2002) to allow companies and investors to enfranchise a house. To do that, the residence requirement was removed so that there is a simple requirement of two years’ ownership.

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