Part I of Landlord and Tenant Act 1987 – Relevant disposal by landlord – Tenants’ right of first refusal – Freeholders of block of flats granting overriding lease of roof space to headlessee to be surrendered following development and sale of two flats in that space – Express provision that roof space lease not to merge with existing headlease – Whether surrender provisions amounting to relevant disposal attracting tenants’ right of first refusal – Whether headlessee constituting tenants’ “landlord” for that purpose – Claim dismissed
The claimants were the long leaseholders of two flats in a block. Their immediate landlord was the third defendant, which held a headlease of the entire block for a term expiring in 2060; the first and second defendants owned the freehold. In 2007, planning permission was obtained for the construction of an additional two flats in the roof space of the block. The first and second defendants thereupon granted an overriding lease of the roof space to the third defendant for a term expiring in 2130. The roof space lease provided for the third defendant to construct the two flats, sell long underleases at the open market value and pay 50% of the net proceeds of sale to the first and second defendants. Within one month thereafter, the third defendant was to surrender the roof space lease to the first and second defendants; alternatively, if it did not materially commence the works to the roof space within five years, it was to surrender the roof space lease on written request. There was a declaration that, on such surrender, the roof space lease would not merge with the existing headlease.
In 2011, the claimants served notices on the defendants, under Part I of the Landlord and Tenant Act 1987, asserting that the provisions for surrender in the roof space lease constituted a “relevant disposal” by the third defendant as their landlord, within section 5, so as to attract the tenants’ statutory right of first refusal. They contended that the surrender provisions were contracts that, at the claimants’ election pursuant to section 12A, should take effect as though the third defendant had made them with the claimants rather than with the first and second defendants, with the result that the third defendant was to transfer the roof space lease to the claimants. The claimants acted as representatives of the lessees of 28 of the flats, who together constituted the requisite majority of qualifying tenants under the Act.
The defendants submitted that the surrender provisions involved no disposals by the “landlord”, as defined in section 2(1), since the third defendant, in its capacity as lessee of the roof space, was not the immediate landlord of any of the tenants of the existing flats.
Held: The claim was dismissed.
The surrender provisions did not constitute a “relevant disposal” by the third defendant within the meaning of the Act for the purposes of triggering the tenants’ statutory rights of pre-emption. There was no disposal of or affecting its reversionary interest under the headlease. The third defendant had entered into the surrender provisions not in its capacity as the tenants’ “landlord” under the 1987 Act, but as the owner of a different, superior interest under the separate and unmerged roof space lease. A dealing with a separate, superior reversion, which did not touch the inferior reversion, could be entered into without triggering the inferior tenants’ rights: Belvedere Court Management Ltd v Frogmore Developments Ltd [1997] QB 858; [1996] 1 EGLR 59; [1996] 05 EG 131 applied. The exception to that principle, concerning short reversions, did not apply in the instant case: see section 2(2). The roof space lease did not effect a relevant disposal of the reversion on the headlease so as to trigger the tenants’ rights under the Act, but merely effected a contingent disposition of the next superior interest. It did not matter that the same party held that next superior interest, so long as it was an identifiably separate interest. The declaration in the roof space lease, expressly preserving the separate existence, identity and operation of the headlease and the roof space lease and precluding merger of those two interests, meant that the surrender provisions could operate only on the latter.
It was insufficient, for the purposes of the Act, that the surrender provisions in the roof space lease could potentially affect the existing headlease in future, in the event that the first and second defendants waived compliance with the non-merger provision, the third defendant decided to merge its two interests, and the first and second defendants then operated the surrender provisions, so effecting a change of ownership of part of the reversion of the headlease. That was too far too from the mechanism by which the Act was intended to operate. It depended not only on a chain of circumstances at least one of which was outside the third defendant’s control but also on the proposition that a merger of leasehold interests was not a “relevant disposal” as a matter of law, which was far from certain. The possibility of such a chain of events occurring created no interest or potential interest in the relevant reversion, as contrasted with a more immediate contingency, such as the direct grant of a break clause. Any such chain of future transactions would fall to be considered according to its properly analysed legal effects at the time.
The policy of the Act was not expropriatory. The landlord was not obliged to make a disposition but, if it chose to do so on certain terms, it was required to offer the same deal to its tenants before proceeding with a third party. In principle, therefore, the operation of the Act should be financially neutral between landlord and tenant. Neither was intended to make a windfall. The underlying objective of the qualifying tenants in the instant case was not the transfer of rights that would enable them better to manage their own residential environment, pursuant to the purpose of the Act, but to acquire an interest with a value as regards the potential further development of the block, which could then be negotiated to advantage with the superior landlords. That consideration reinforced the conclusion that the claimants were not entitled to a transfer of the roof space lease.
Stephen Jourdan QC (instructed by Forsters LLP) appeared for the claimants; Anthony Radevesky (instructed by Pemberton Greenish LLP for the first and second defendants and Wallace LLP for the third defendant) appeared for the defendants.
Sally Dobson, barrister
