The Landlord and Tenant Act 1987 has been rendered obsolete and should be retired, writes Ellodie Gibbons
Artist Court Collective Ltd v Khan [2016] EWHC 2453 (Ch); [2016] PLSCS 265 received a lot of attention when it was decided in the county court, largely because there are so few reported decisions under Part I of the Landlord and Tenant Act 1987 (“the Act”).
Now decided in the High Court, does the case advance our understanding of the Act or is it just another example of why the Act no longer serves a useful purpose for tenants and is an unnecessary headache for landlords?
First refusal
The Act gives tenants of qualifying premises a right of first refusal in respect of a “relevant disposal” of their landlord’s interests. It was enacted following the report of the Committee of Inquiry on the management of privately owned blocks of flats.
The report proposed a right to appoint a manager in the event of serious default by the landlord. However, given that proposal, and while identifying strong support for a general right of collective enfranchisement, the report concluded that a right of first refusal was sufficient. The Act was rushed through parliament before the 1987 general election for political reasons and has been roundly criticised as being “ill-drafted, complicated and confused” (Sir Nicolas Browne-Wilkinson V-C in Denetower Ltd v Toop and others [1991] 1 EGLR 84).
A disposal in breach of the Act gives tenants a right to acquire the interest disposed of from its new owner and is also a criminal offence. However, there is sparse evidence of any landlord having ever been prosecuted under the Act and the right to acquire carries with it an obligation to reimburse the disponee in respect of the consideration paid.
Further, by virtue of section 4, various disposals are exempt from the provisions of the Act.
The Act in practice
Experience from practice suggests that some landlords are oblivious to the provisions of the Act and that, luckily for them, their tenants are either similarly oblivious or else are not sufficiently organised or motivated to take advantage of their rights.
Meanwhile, savvy landlords are able to structure their portfolios and transactions so as to either avoid the provisions of the Act or make disposals so unattractive that tenants do not want to take the benefit of them. There remain those landlords who tie themselves up in knots and large legal bills trying to apply the provisions of the Act to their particular property or transaction and the very unlucky few who transfer properties at an undervalue and provide their tenants with a windfall. This is what almost happened in Artist Court.
The landlord of Artist Court, Khan, entered into a deed of trust and a contract for the sale of the block with a company. The trust deed stated that the property was held by the company on trust for Khan. Title to the block was then transferred to the company.
The Act was not complied with and when the tenants became aware of what had happened, they sought to acquire the block. The company then transferred the block back to Khan for nil consideration (the second transfer).
On appeal it was held that the trust declared by the company took effect simultaneously with the transfer of the property to it, with the effect that all the company ever acquired was the legal title impressed with the trust.
As to the second transfer, section 4(2)(g) of the Act provides that “a disposal consisting of the transfer of an estate or interest held on trust for any person where the disposal is made in connection with the appointment of a new trustee or in connection with the discharge of any trustee” is exempt from the provisions of the Act.
It was held that there was nothing in the language of section 4(2)(g) which prevented its application to a situation where the legal estate in property held on trust for a beneficiary was conveyed to the beneficiary, thereby terminating the trust and discharging the trustee.
Henderson J thought that to construe section 4(2)(g) otherwise would constitute a serious trap for unwary landlords who were called on to transfer trust property to a beneficiary.
However, it is only as such a trap, or rather as a means of providing a windfall for the tenants of such landlords, that the Act arguably serves any real purpose.
Ignorance isn’t bliss
The Act was a compromise; a means of giving tenants more control over the running of the buildings in which their flats were situated without giving them a full-blown right to collectively enfranchise. However, other legislation has overtaken the Act.
The Leasehold Reform, Housing and Urban Development Act 1993 gives tenants that full-blown right and, for tenants unwilling or unable to go the whole hog, the Commonhold and Leasehold Reform Act 2002 provides a no-fault right to manage. The qualification criteria differ between the statutes. However, in the majority of cases the same tenants will be able to utilise all three Acts.
Where a landlord is disposing of his freehold interest at full market value, the tenants will not necessarily pay more by collectively enfranchising and will be able to acquire the freehold at a time of their choosing.
This not only means that they can choose to acquire it when the market may be particularly favourable to them, but also provides them with time to organise and raise funds.
The main advantage of the Act therefore is that when an unwary landlord transfers his property at less than full market value, the tenants have the right to take advantage of his ignorance.
Is that really a right the law should provide?
Ellodie Gibbons is a barrister at Tanfield Chambers
