Collective enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Leasehold valuation determining terms of acquisition of freehold by respondent on collective enfranchisement claim – Terms including leasebacks to appellant freeholder of three flats in relevant building – Appellant dissatisfied with terms of leasebacks – Appellant subsequently granting leases of those three flats to qualifying tenants – Whether appellant entitled to grant new leases – Whether thereby able to circumvent decision of LVT and avoid taking leasebacks as determined – Appeal allowed
The respondent company was the nominee purchaser on a claim by the qualifying tenants of eight out of 11 flats in a converted townhouse in London SW7 to acquire the freehold of the building by collective enfranchisement under Chapter I of Part I of the Leasehold Reform, Housing and Urban Development Act 1993. The appellant freeholder controlled the other three flats in the building. In their initial notice under section 13 of the Act, the qualifying tenants proposed to grant leasebacks of two of those flats to the appellant as part of the terms of acquisition. By its counternotice, the appellant required a leaseback of the third flat also, pursuant to para 5 of Part III of Schedule 9 to the Act and in accordance with section 36.
The leasehold valuation tribunal (LVT) determined the disputed terms of acquisition, including the terms of the three leasebacks, and the price payable on acquisition. The appellant was dissatisfied with the LVT’s decision and appealed to the Upper Tribunal. Meanwhile, it granted long leases of the three flats to three companies, on the terms that it had originally proposed for the leasebacks but which the LVT had rejected. The appellant owned all the shares in two of those companies, while the third was effectively owned by two individuals; the lettings were designed to produce a situation where the lessees of the three flats were qualifying tenants.
An issue arose as to whether the appellant as entitled to circumvent the LVT’s decision in that way. The appellant argued that: (i) while the enfranchisement process progressed, it remained free to dispose of its property save only for the dispositions prohibited under section 19 of the Act, namely those that would sever the freehold or create new leases that, had they existed when the initial notice was given, would have been liable to acquisition by the nominee purchaser; (ii) a freeholder could only require a leaseback under para 5 of Schedule 9 of a flat that was not, immediately before the “appropriate time”, namely the time of acquisition of the freehold, a flat let to a person who was a qualifying tenant of it; and (iii) consequently, it had been free to grant the long leases of the three flats and those flats could no longer be the subject of leasebacks.
Held: The appeal was allowed.
The Upper Tribunal had power to consider the terms of acquisition, including whether there should be leasebacks, in the current circumstances. The terms of the leasebacks had never been agreed and would not be finally determined until the resolution of the appeal against the LVT’s decision. The parties’ expectation that there would be leasebacks was not contractual: Cawthorne v Hamdan [2006] 3 EGLR 183 applied.
The appellant had been entitled to grant the leases of the three flats, notwithstanding that the effect was to engineer circumstances in which the flats were held by qualifying tenants and so evade the consequences of the LVT’s decision. It was consistent with the statutory scheme for the freeholder to grant new leases while the claim to enfranchise continued, provided that it did not infringe section 19. In the absence of a binding agreement or estoppel, the appellant was entitled to grant new leases of the three flats at any time until the determination by the LVT of the terms of acquisition, because such a grant was not prohibited by section 19. Neither an agreement of the terms of a leaseback nor a determination by the appropriate tribunal took away that freedom. The 1993 Act made no express provision for any additional limitation on the freeholder’s entitlement to deal with its own property once the terms of a leaseback had been agreed or determined, nor could any such limitation be implied. The 1993 Act did not create a statutory contract binding the parties to proceed on the terms agreed or determined by the appropriate tribunal: Barrie House Freehold Ltd v Mahfouz [2012] EWHC 353 (Ch) applied.
Whether a leaseback was to be granted could not finally be known until immediately before the “appropriate time”, namely immediately before the nominee purchaser acquired the freehold: see paras 2(1) and 5(1) of Schedule 9. The conditions for the freeholder’s entitlement to a leaseback had to exist at that time. If, at that time, the flat was let to a qualifying tenant, there was no obligation on the freeholder to take a leaseback under Part II of Schedule 9 and no entitlement to do so under Part III. Nor was there any obligation on the nominee purchaser to grant a leaseback. Section 36(1), which imposed that obligation, applied only in respect of leases which were required to be granted by virtue of Parts II and III of Schedule 9.
The appropriate tribunal did not have a discretion to refuse to recognise a change of circumstances having the effect that the conditions for the grant of a leaseback were no longer satisfied. Although section 24(4) allowed the terms of acquisition to be modified on the application of either party where there had been any change of circumstances, any exercise of the power to modify terms of acquisition in the light of changed circumstances, or any refusal to exercise that power, had to be consistent with the statutory scheme.
The grant of the new leases was a change of circumstances. The fact that registration had not been completed did not mean that the new leases were not tenancies for the purpose of the 1993 Act. Therefore, the only grounds on which the respondent could insist on the grant of leasebacks would be either if a contract had come into existence between the parties for a grant of leasebacks on the terms determined by the LVT, or if the appellant was prevented by an estoppel from taking advantage of the freedom allowed by the Act to grant new leases until immediately before the appropriate time.
There was no enforceable contract for the grant of leasebacks since no document satisfying the requirements of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 had ever come into existence. The inclusion in the appellant’s counternotice of a statement that it accepted the participating tenants’ proposals for leasebacks, and additionally required a leaseback of the third flat, could not be understood as committing the appellant to leasebacks whatever terms were determined by the LVT and whether or not the conditions in paras 2(1) and 5(1) of Schedule 9 were satisfied immediately before the appropriate time.
Nor did any estoppel arise. It was difficult to see anything unconscionable in a freeholder exercising the freedom to deal with its own property which the 1993 Act allowed it until immediately before the completion of the acquisition of that property. The effect of any such dealing would also be reflected in the price paid for the freehold by the nominee purchaser and if, as in the instant case, the appropriate tribunal had already quantified the difference in price attributable to the grant of leasebacks, the acquisition need not be significantly delayed. While there was likely to be some wasted expenditure, which might be considerable, that was a risk that the nominee purchaser and the participating tenants took to obtain the freehold. Any dispute over the terms of a leaseback was conducted against the background that a change of circumstances might render the dispute redundant and the costs incurred wasted. It followed that the effect of the new leases of the three flats, which were held by qualifying tenants, was that no leasebacks of those flats could be insisted on by either party when the acquisition of the freehold was completed.
Stephen Jourdan QC (instructed by Forsters LLP) appeared for the appellant; Carl Fain (instructed by Swabey & Co) appeared for the respondent.
Sally Dobson, barrister
Click here to read the transcript: Queensbridge Investment Ltd v 61 Queens Gate Freehold Ltd
