Key points
• Freeholders can retain ownership of certain units when leaseholders are enfranchising
• A freeholder cannot insist on a leaseback of a unit that is under construction or build a new unit on a common part
Leaseholders who have qualifying leases of their flats have a collective right to purchase the freehold to the building under Part I of the Leasehold Reform, Housing and Urban Development Act 1993. In order to qualify, their leases must be long residential leases. In some cases, however, not all of the flats or other units in the building will have been sold on long leases. In these cases the freeholder has the option of retaining ownership of those units. For example, the building may contain a shop or other commercial premises. In other cases the flat may not have been sold on a long lease and instead retained the ownership of the freeholder, who may rent it out.
In these situations, the freeholder has a choice. It can allow the enfranchising leaseholders to acquire the whole of the building (and pay a premium representing all the interests in the building). Or the freeholder can exercise the right to take a leaseback of any unit in the block that is not held on a qualifying lease (a factor that will also affect valuation of the premium to be paid). (If the freeholder is a social landlord, leasebacks of flats that are rented are mandatory in order to preserve the rights of the tenants who may have a secure tenancy or an assured tenancy.)
Leaseback of units not held on qualifying leases
Since Cawthorne v Hamdan [2007] EWCA Civ 6; [2007] 1 EGLR 67, the freeholder must state in its counter-notice if it wishes to take a leaseback. To raise it later during the claim is too late.
But what if building works are taking place or are intended when the leaseholders give their enfranchisement notice? Can the unit the freeholder is working on be the subject to a leaseback? Does the fact that the new unit or proposed new unit is being built on an area that is a common part make a difference?
This was the issue in Merie Bin Mahfouz Co (UK) Ltd v Barrie House (Freehold) Ltd [2014] UKUT 390 (LC). (The issues on the erection of mobile telephone masts are not considered here.)
New units added or proposed
In Merie Bin, the first party was the freeholder of a substantial building situated near Kensington Gardens in London. It consists of 11 floors, including a basement, the ground floor and nine stories above that under a flat roof. Originally there were 27 flats held on qualifying leases and a porter’s flat in the basement. Of the flats, 23 of the leaseholders participated in the enfranchisement claim. There was also a substantial entrance hall in which the freeholder had built another flat (“flat 21A”), which it retained in its ownership (building was continuing when the leaseholders gave their claim notice).
The freeholder admitted the claim and it made counter-proposals on the premium to be paid and the terms of the freehold transfer. Crucially, it also claimed in the counter-notice leasebacks of three units, that is flat 21A, the porter’s flat and an office in the basement.
This was opposed by the leaseholders, who maintained that neither the flat nor the basement office were built when the enfranchisement claim was started (and that they are built on a common part). They also argued that the freeholder had no right to claim any part of the common parts such as the porter’s office.
In response, the freeholder submitted that it is entitled to deal with the freehold as it thinks fit unless this is prohibited by the 1993 Act and that there is no rule that a unit cannot be claimed under a leaseback only if it existed when the enfranchisement claim is started.
Units under construction
Can a freeholder claim a leaseback of a unit which did not exist when the enfranchisement claim started?
The Upper Tribunal (UT) preferred the submissions made on behalf of the leaseholders. The structure of the enfranchisement provisions in the 1993 Act is such, it reasoned, that it can only apply to flats or units that actually exist at the “relevant date”, that is, the date when the enfranchisement notice is given.
Although the freeholder is free to make changes to the building, if it does this by creating a new unit there is no entitlement to a leaseback if it is created after the relevant date though it is possible that the landlord could claim development value for that unit or units.
Units built on a common part
As to the alternative challenge to the leasebacks, again the UT preferred the leaseholders’ submissions. The scheme of the 1993 Act, it stated, is to allow a qualifying group of leaseholders to acquire the freehold of the building containing their flats including any common parts in the building. A freeholder cannot have a leaseback of a unit that was built in the common parts.
The UT noted Cadogan v Panagopoulos [2011] Ch 177, where it was held that a flat that is used for accommodation for a caretaker who services the building at the relevant date can be a common part. In that case, it was also necessary for the leaseholders to acquire the lease that had been granted of the flat to a nominee of the freeholder, so that it could manage it properly post the acquisition of the freehold.
Equally, as it is in a common part, the freeholder was not entitled to a leaseback of the porter’s office either.
James Driscoll is a solicitor, a writer and a freelance lecturer
