Leasehold Reform, Housing and Urban Development Act 1993 – Collective enfranchisement – Claim to acquire freehold of building on behalf of leaseholders of flats – Existing leases conferring revocable licence to use garden – Respondent freeholder proposing to retain freehold of garden – Nature of rights in lieu to be granted over garden under section 1(4)(a) – Whether section 1(4)(a) requiring grant of irrevocable right – Application to determine disputed terms of acquisition – Application determined in favour of applicant
The applicant company was the nominee purchaser for the purposes of a claim by the long leaseholders of flats in three adjoining town houses in Southwark, London SE1, to acquire the freehold of the building from the respondent freeholder by collective enfranchisement under Chapter I of Part I of the Leasehold Reform, Housing and Urban Development Act 1993.
To the rear of the town houses was a garden which the leaseholders had the right to use pursuant to a licence set out in their leases. The licence was expressed to be revocable by the lessor by giving notice in writing at any time. The respondent proposed to retain the freehold of the garden and instead offer rights over it in lieu of its acquisition by the applicant. An issue arose as to what rights over the garden the applicant should acquire, pursuant to section 1(4)(a) of the 1993 Act, as permanent rights similar to those enjoyed in relation to the flats at the time when the process of acquisition commenced. The applicant contended that it was entitled to an irrevocable right to use the garden. The respondent argued that, since the right conferred by the existing leases was a revocable licence, the right to be acquired under section 1(4)(a) should similarly be of a revocable nature.
The applicant applied to the first-tier tribunal (FTT), under section 24 of the 1993 Act, for a determination of that issue as a disputed term of acquisition. The matter was transferred to the Upper Tribunal because it raised an issue of principle on which the FTT was bound by a previous Upper Tribunal decision in Fluss v Queensbridge Terrace Residents Ltd [2011] UKUT 285 (LC), which the respondent argued was wrongly decided. The judge in Fluss had taken the view that rights of a revocable nature could not satisfy the requirement in section 1(4) for the grant of “permanent rights”. The same judge had subsequently adhered to that view in Snowball Assets Ltd v Huntsmore House (Freehold) Ltd [2015] UKUT 338 (LC); [2015] EGLR 61, although that issue did not strictly arise in light of his decision on other aspects of the case.
Held: The application was determined in favour of the applicant.
(1) Section 1(4) entitled the freeholder to offer, in lieu of the acquisition of the freehold of certain land, alternative rights which were to be taken to satisfy that right of acquisition. The land in respect of which that right of substitution was available to the freeholder was land over which at least one qualifying tenant enjoyed rights under the lease of their flat, in common with the occupiers of other property. The right of acquisition would only be taken to be satisfied where the freeholder granted “such permanent rights” as would ensure that thereafter the occupier of the flat had “as nearly as may be the same rights as those enjoyed” on the relevant date. The substituted rights did not have to be identical rights to those conferred by the qualifying tenant’s lease but instead had to be “as nearly as may be the same” as those enjoyed on the relevant date. That slightly awkward expression suggested a requirement of equivalence, so that the new right had to be as close to being identical to the original right as it was possible to achieve. At the same time, the rights were also to be “permanent rights”. The characteristics of permanence and equivalence were difficult to reconcile in cases where the rights originally enjoyed by the qualifying tenant were revocable at the will of the landlord.
(2) The context in which the rights were to be granted was relevant to resolving the tension between the competing requirements of permanence and equivalence. The fact that the rights to be granted under section 1(4)(a) were to be taken to satisfy the default right of acquisition in respect of the freehold provided an important indication of the extent of those rights. In the default case where no rights were offered, the qualifying tenant was left with the rights of a freehold owner of the land. The proper inference was that the intention of the statute was not simply that the tenants were to enjoy the same rights as before, but that they were to enjoy them in perpetuity.
The requirement of permanence imposed by section 1(4)(a) was a necessary reflection of the fact that the nominee purchaser was to acquire the freehold of the relevant premises in the expectation of granting new long leases to the qualifying tenants of the flats in the building. The tenants’ existing rights, which would last only for the term of their leases, were to be exchanged for new rights of indefinite duration. Nevertheless, the requirement of permanence did not serve only that function. The rights themselves had to be capable of being described as permanent and their enjoyment “thereafter” had to be ensured. To comply with section 1(4)(a), the rights offered had to be free of any condition for termination. Where the rights originally enjoyed by a qualifying tenant under the lease of the flat were revocable, the requirement of permanence therefore meant that they had to become irrevocable on the completion of the transfer.
(3) Section 1(4)(a) contemplated that the rights to be enjoyed might not be identical in every respect to the original rights. The possibility of modification was necessary not only because the replacement rights might be granted over different property, but also because of the overriding requirement of permanence which might be inconsistent with the original formulation of the rights.
That formerly temporary rights should be replaced, on enfranchisement, by perpetual rights should not be regarded as an improbable result. The whole purpose of the enfranchisement code was to replace the limited leasehold rights enjoyed by qualifying tenants with permanent rights; moreover, the Act provided for landlords whose interests were diminished in value, or who sustained damage in respect of land other than the specified premises, to be compensated in the form of the premium payable by the tenants under Schedule 6. Furthermore, para 2(1) of Schedule 7 to the Act provided that, unless the nominee purchaser consented or its exclusion was necessary to preserve any existing interest of the freeholder in tenant’s incumbrances, the conveyance of the freehold interest to the nominee purchaser should not exclude or restrict the general words implied into conveyances under section 62 of the Law of Property Act 1925. Section 62 operated to pass with a conveyance all rights enjoyed with the land and to convert them into full legal rights, even where, as previously enjoyed, they were precarious rights. It should not therefore be thought surprising in principle that, under section 1(4)(a), a revocable licence granted to qualifying tenants to use a garden was to be replaced by an irrevocable right in order to meet the requirement of permanence.
It followed that that, for the respondent to avoid the need to transfer the freehold of the garden to the applicant, the right to use the garden had to be irrevocable.
(4) The foregoing issue did not in fact arise for decision in Fluss, in which the tribunal was concerned, not with the issue of revocation, but with whether the rights over the amenity land were to be susceptible to a power of regulation, in a case where no regulations had been made before the relevant date. There was a distinction between a power to regulate rights and a power to terminate them. The requirement of equivalence meant that rights conferred by the lease should continue to be enjoyed subject to the same restrictions as existed on the relevant date, and subject also to any power existing on that date to regulate the enjoyment of the rights, whether or not the power had yet been exercised. The tribunal disagreed with the decision in Fluss so far as it had decided the contrary, while agreeing with it on the issue of termination.
Piers Harrison (instructed by Ashley Wilson Solicitors LLP) appeared for the applicant; Anthony Radevsky (instructed by Forsters LLP) appeared for the respondent.
Sally Dobson, barrister