Landlord and tenant – Leasehold enfranchisement – Right to acquire freehold – Defendant secretary of state making bulk sale and leaseback of service family accommodation to first claimant – Defendant later seeking to exercise right to leasehold enfranchisement – Defendant incorporating special purpose vehicle to hold freehold of properties – Whether defendant having right to enfranchise – Whether freeholder and defendant single entity under principle of Crown indivisibility – Whether consent of first claimant required – Whether properties occupied under business tenancy – Whether enfranchisement constituting compulsory acquisition and appropriation – Claims dismissed – Counterclaim allowed
In 1996, the defendant secretary of state entered into an agreement with the claimant for the sale and leaseback of about 80% of its service family accommodation (SFA) to raise funds to enable it to upgrade the condition of the accommodation, dispose of surplus properties and secure value for money through a competitive sale. The purchase price was £1.662bn. On the same date, the defendant granted 740 999-year headleases of 765 sites across England and Wales compromising 55,060 residential units. The defendant retained the freehold reversion to those headleases.
The sites were leased back to the defendant by underleases, each for a term of 200 years. The rent was subject to review and the defendant was entitled to terminate its underleases of sites or parts of sites on six months’ notice.
Between December 2021 and April 2022, the defendant served notices on the claimant under section 5 of the Leasehold Reform Act 1967 to enfranchise eight properties in Lincolnshire and Bristol. It set up a special purpose vehicle (the second interested party) to hold the freehold of the properties to be enfranchised. The first interested party was an arm’s length body which supplied the defendant with corporate finance and commercial advice in relation to, amongst other things, enfranchisement issues.
An issue arose whether the defendant was entitled to enfranchise the properties and, if so, whether his decisions to exercise those rights were unlawful on public law grounds. The claimants challenged the notices in declaratory proceedings in the Chancery Division and applied for judicial review in the Administrative Court. As there was substantial overlap, the different claims were heard together. The defendant also brought a counterclaim.
Held: The claim was dismissed. The counterclaim was allowed.
(1) Prima facie in public law a minister or secretary of state was an aspect or member of the Crown. The indivisibility of the Crown was not an absolute principle and was capable of being disapplied or modified, for example, by Act of Parliament. Standard principles of public law also demonstrated that Crown indivisibility might not apply even within a single government department.
A company incorporated under the Companies Act 2006 as a corporation aggregate had a separate legal existence and personality from persons who controlled the company and its shareholders. The claimants had not referred to any authority which treated the Crown as an entity embracing more than the departments and their ministers which make up the government. There was no principle to the effect that Crown indivisibility prevented a minister from setting up a structure to discharge governmental functions as a separate entity outside the Crown. Therefore, Crown indivisibility did not apply to the second interested party set up by the defendant as a separate entity from the Crown: Town Investments Ltd v Department of the Environment [1977] 1 EGLR 33; [1978] AC 359 considered.
(2) Section 33(1) of the Leasehold Reform Act 1967 defined specific circumstances in which the Act would apply to a tenancy held from the Crown. The first limb provided that where there ceased to be a Crown interest in the land before the tenant wished to enfranchise, Part I of the 1967 Act applied in favour of the tenant as in the case of any other tenancy.
The second limb applied where a subtenant sought an extended lease, not the freehold, and a superior landlord holding a tenancy from the Crown had a sufficient interest to grant such a lease (a term of 50 years) and was entitled to do so without the agreement of the “appropriate authority”, here the defendant.
The third limb applied where either a subtenant sought an extended lease of a length which a superior landlord was not entitled to grant without the Crown’s consent, or the subtenant sought the freehold, and the “appropriate authority” for the relevant Crown interest (here the defendant) notified the landlord holding a tenancy from the Crown (here the first claimant) that as regards any Crown interest affected the authority would grant or concur in granting the freehold or the extended lease
(3) There was nothing in the 1967 Act to indicate that the transfer by a government minister either to an SPV or to a bare nominee under his direction, for the purpose of overcoming the bar on enfranchisement by an underlessee who already owned the freehold, was to be treated as a transfer to an entity of the Crown rather than to a separate entity.
Section 33(2) did not treat property belonging to an entity which did not form part of the Crown as a Crown interest and was not to be interpreted as extending the concept of Crown indivisibility by the back door.
(4) The defendant was entitled to rely upon the first limb of section 33(1) in relation to seven of the properties. In any event, the defendant had served notices under section 33(1)(b) in relation to those properties as a precautionary measure and was entitled to rely on the third limb of section 33(1). The defendant had served a notice under section 33(1)(b) in relation to eighth property and was entitled to rely upon the third limb of section 33(1) contained therein. Accordingly, section 88 of the Leasehold Reform, Housing and Urban Development Act 1993 did not apply so that there was no requirement for the consent of the first claimant to the enfranchisement: Gratton-Storey v Lewis [1987] 2 EGLR 108 considered.
However, the defendant could not rely on the first limb of section 33(1) in relation to one of the properties, where the application to register the second interested party was made after the enfranchisement notice had been served. In that case, at the date of service of the notice, there had not ceased to be a Crown interest in the freehold reversion because the defendant was still its legal owner, holding it on trust for the second interested party. In respect of that property, the defendant had to rely on the third limb contained in section 33(1)(b), which applied where there continued to be a Crown interest in the land, but the “appropriate authority” notified the landlord that as regards any Crown interest affected it would grant or concur in granting the freehold or extended lease.
(5) Under section 56 of the Landlord and Tenant Act 1954, where certain conditions were met, Part II of that Act applied to cases where there was an interest in land belonging to a government department or held on behalf of the Crown for the purposes of a government department. By section 56(3), the requisite conditions would be met where the whole or part of the premises let to a government department was occupied for the purposes of that department or another government department. Whether premises were so occupied fell to considered from the viewpoint of the occupier. While an occupier who was not a government department might still be in occupation for such purposes, if the wrong viewpoint was used the answer to the statutory question would be flawed by improper reasoning, Applying that approach to the present case, together with the established test of “occupation”, there was no occupation for the purposes of the government in respect of any of the residential units, or of garages from time to time let to residents on separate licences.
In respect of the site where there were common parts in addition to the residential units, the artificial arrangements making the second interested party the business tenant of the common parts, did not breach or offend any purpose or principle of, or any prohibition or disqualification in, the 1954 Act or the 1967 Act. The purposes of those arrangements was not only to provide and maintain the common parts, but also to sublet them to the second interested party as occupier so that section 1(1B) of the 1967 Act, imposing a residence requirement for enfranchisement by the tenant under a business tenancy, would not apply to the defendant’s underlease, enabling the defendant to enfranchise without interfering with the operation of the pre-existing maintenance arrangements.
(6) Parliament did not intend to give a wider ambit to the principle of Crown indivisibility for the purposes of the 1954 Act and the second interested party was not for that purpose to be treated as part of the Crown. It followed that Part II of the 1954 Act did not apply to the defendant’s underlease of either of the two sites and the exclusion from enfranchisement in section 1(1B) of the 1967 Act did not apply to any of the notices to enfranchise. Therefore, each of the eight notices to enfranchise served in relation to the properties remained valid and effective under the 1967 Act.
The 1967 Act, by conferring a private law right to enfranchise on all qualifying tenants, created a statutory right which was distinct from, and not analogous to, a discretionary power of compulsory purchase which could only be used for the purpose of empowering legislation.
A tenant’s exercise of the right to enfranchise was one of the incidents of a tenant’s rights which parliament had chosen to confer. While a public authority in the position of the defendant had a choice whether to exercise the right to enfranchise, and the decision to serve an enfranchisement notice was subject to some public law principles and therefore amenable to judicial review. The grounds on which a court might intervene were those relevant to a decision by a public authority to exercise a contractual or property right, namely fraud, corruption, bad faith and possibly breach of legitimate expectation.
(7) The constitutional principle limiting the scope of compulsory acquisition or appropriation was inconsistent with the well-established approach of the courts to public law challenges to the exercise by a public authority of private law rights and thus did not apply to a decision to enfranchise. The claimants did not allege bad faith, fraud or corruption and there was nothing improper about a public authority serving enfranchisement notices to test the merits of that course as a means of extricating the government from sale and leaseback arrangements which had been a bad deal for them and the taxpayer for some years and would continue to be so.
The defendant was entitled to participate in the commercial market in the usual way by exercising the full bargaining power available to him to secure the best deal possible, as a matter of public interest. On analysis, there had been no improper motive for serving the enfranchisement notices.
Accordingly, the enfranchisement notices served by the defendant were all valid under the 1967 Act and the application for judicial review of the decision to serve those notices was dismissed: Dudley Muslim Association v Dudley Metropolitan Borough Council [2015] EWCA Civ 1123; [2015] PLSCS 315; [2016] 1 P & CR 10 applied. Prest v Secretary of State for Wales [1983] 1 EGLR 17 distinguished.
Monica Carss-Frisk KC, Jason Pobjoy and Emmeline Plews (instructed by Linklaters LLP) and Zia Bhaloo KC, James Maurici KC, Toby Watkin KC, Mark Sefton KC and Tamsin Cox (instructed by Eversheds Sutherland (International) LLP) appeared for the claimants; Sir James Eadie KC, Ivan Hare KC, David Lowe, Tom Cleaver and Daniel Cashman (instructed by Slaughter and May) and Joanne Wicks KC, Philip Rainey KC, Adam Rosenthal KC, Ceri Edmonds and Daniel Petrides (instructed by Forsters LLP) appeared for the defendant; The interested parties did not appear and were not represented.
Eileen O’Grady, barrister
