Leasehold enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Notices served on claimant freeholders under sections 13 and 42 claiming right to acquire freehold of building and new long leases of four basement flats within it – Basement flats created unlawfully in breach of covenant against further subdivision of property – Whether creation and subletting of flats in breach of covenant and planning control precluding sublessees from being “qualifying tenants” for purposes of enfranchisement under Act – Issue determined in favour of claimants
The claimants owned the freehold of a property subject to a 99-year headlease. As originally built, the property comprised 23 flats on the ground and five upper floors with seven garages in the basement and rear yard. However, the mortgagee in possession of the headlease had subdivided the basement to create several new flats, in breach of a covenant in the headlease prohibiting further subdivision of the property. Between 2010 and 2012, the claimants received several notices claiming to exercise rights of leasehold enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993. The first notice was served under section 13, seeking to acquire the freehold of the property by collective enfranchisement. The notice purported to be served on behalf of “qualifying tenants” of 14 flats, so as to exceed the statutory threshold of not less than one-half of the total number of flats. Three subsequent notices were served under section 42, claiming new long leases of three of the new basement flats.
The claimants brought claims against various defendants, including the mortgagee of the headlease, former headlessees and various tenants of the flats, contending that they had conspired by unlawful means to deprive the claimants of their freehold by falsely claiming to have sufficient qualifying tenancies to pass the statutory threshold. The claimants alleged that this had been done by including within the 14 “qualifying tenants” four tenants who did not in fact qualify since they held subleases, granted unlawfully by the mortgagee, of the new basement flats created in breach of covenant. The claimants also alleged that several of the 14 tenancies, including the four basement subleases, were owned by the mortgagee, who had registering seven of them in the names of his nominees, thereby disqualifying them from being “qualifying tenants” by virtue of section 5(5) of the 1993 Act, and that various subleases had been “sold” or assigned in apparently legitimate commercial transactions in order to disguise the scheme and make it difficult to unravel.
An issue arose as to whether the creation of the new basement flats in breach of covenant and of planning control precluded the tenants of those flats from qualifying for enfranchisement under the 1993 Act.
Held: The issue was determined in favour of the claimants.
The sole purpose of the mortgagee in granting the subleases of the four new basement flats was to enable him, in his personal capacity, to acquire the freehold and gain control of the property. That was an improper use of the powers of a mortgagee, which should be exercised only for the purpose of protecting or realising his security to repay the secured debt rather than for some collateral advantage or gain. The subleases should not be treated as binding on the claimants for the purpose of satisfying the statutory criteria for enfranchisement under the 1993 Act, for the following reasons.
(1) Although each of the three units in respect of which the section 42 notices were served was a “flat” within the meaning of the 1993 Act, there was no long lease of any of them for the purpose of that legislation since the extent of the demise under the subleases did not correspond to the flats as built. Although a demise could include property other than a single flat, it had to include a flat.
(2) While the demise of the fourth basement unit did include a flat let on a long lease, there was no qualifying tenant of it for the purposes of the 1993 Act in circumstances where the basement flats had been created in breach of the covenant in the headlease. The natural and proper construction of “qualifying tenant” was that the “long lease” and the “flat” had to be lawful, that is, not in breach of covenant. The rights granted by the 1993 Act could not be exercised and maintained by those who had unlawfully created and then acquired the subleases and flats. Parliament had not intended to legitimise the illegitimate by statute, so as to vest valuable rights in those who would not have them but for their breach, and to divest the right of others: Cadogan v McGirk [1996] 4 All ER 643; [1996] 2 EGLR 75; [1996] 39 EG 175 applied. That did not mean that there was an absolute prohibition on unlawful long leases or physical alterations to create flats. The unlawful could be rendered lawful by waiver, estoppel or similar means, in which case a “new” qualifying tenant would have been created. To decide whether there was a “long lease” of a “flat” that had been lawfully created, it would be necessary to investigate whether: (i) there had, in substance, been a breach directed at the statutory definition of “qualifying tenant” and its nature and effect; (ii) there had been waiver or estoppel or such like; and, perhaps (iii) any breach was one of substance such that a landlord, acting reasonably, could properly have objected to it had its consent been sought. The creations of the four basement flats and their subleases was unlawful in the instant case.
(3) A similar enquiry would arise where new flats were created in breach of planning legislation and building regulations. Although it was not always necessary that planning permission should have been granted at the time when the enfranchisement notice was served, it had to be asked whether the breach of planning control was substantial, whether there was deemed consent by virtue of four years’ use and whether retrospective permission had been granted or had a realistic prospect of being granted. There could be minor transgressions; whether a breach was of sufficient substance as to prevent the flat from falling within the 1993 Act would be a question of fact and degree. The four new basement flats had been created in breach of planning legislation and building regulations. While each was a “flat” within the meaning of the 1993 Act, none could properly be regarded as “constructed or adapted for living in”, within the definition in section 101(1) of the 1993 Act, where the flats had been built in breach of planning control and would never receive planning permission.
(5) Finally, the maxim that a person could not benefit from his own wrong, and could not take the benefit of statutory rights if he had to prove or rely upon his own unlawful acts, applied in the instant case to preclude the mortgagee or his successors in title from participation in the service of enfranchisement notices: Welwyn Hatfield Borough Council v Secretary of State for Communities and Local Government [2011] UKSC 15; [2011] 2 AC 304; [2011] 2 EGLR 151 applied.
Philip Rainey QC and James Fieldsend (instructed by Charles Russell) appeared for the claimant; Adam Chambers (instructed by Myers Fletcher Gordon) appeared for the 10th defendant in the second claim and the second defendant in the fourth claim; the other defendants did not appear and were not represented.
Sally Dobson, barrister
