Elizabeth Dwomoh takes a look at a recent appellate decision concerning a breach of the right of first refusal under the Landlord and Tenant Act 1987.
Key points
- It was for the party seeking the transfer to bind all interests in the property to be transferred and to join a third party with an alleged interest to the proceedings
- A section 19(1) order under the Landlord and Tenant Act 1987 does not give rise to an immediate equitable interest in the land
The rule in Henderson v Henderson (1843) 3 Hare 100 prevents a party from raising in subsequent proceedings matters which were not, but could and should have been, raised in earlier proceedings.
The need for finality in litigation is the public policy reason behind this type of conduct being classified as an abuse of process. Does it amount to an abuse of process for a person to counterclaim for a declaration in subsequent proceedings that they have been granted equitable leases of premises prior to the making of an order under section 19 of the Landlord and Tenant Act 1987, in circumstances where they did not apply to be joined as a party to the section 19 proceedings?
This question and the important question of whether a section 19 order created an immediate equitable interest in land fell to be determined by the Court of Appeal in Donovan v Prescott Place Freeholders and others [2024] EWCA Civ 298; [2024] PLSCS 64.
The statutory provisions
Qualifying tenants of flats have the “right of first refusal” in respect of a “relevant disposal” of the landlord’s reversionary interest in the premises under section 1 of the 1987 Act. Pursuant to section 4(2)(g), a disposal consisting of a transfer of an interest held on trust for any person where the disposal is made in connection with the appointment or discharge of a trustee is not a relevant disposal.
If the landlord makes a “relevant disposal” to a third party without first offering the same to the qualifying tenants, the tenants can compel a transfer to their nominee purchaser by serving notice under section 12B(2). A landlord who refuses to comply with a section 12B notice can be compelled to do so if the tenants successfully apply to the county court for an order under section 19.
The factual matrix
Stephen Donovan acquired 34-36 Prescott Place, Clapham, London SW4, in 2004. He subsequently executed a deed declaring that he held the premises on trust for his brother, the appellant, Joseph Donovan.
The premises were redeveloped into flats. In 2014, Stephen Donovan executed a transfer of the freehold title to the ninth respondent, Constantin Batin, in breach of section 1.
The second to eighth respondents were the long leaseholders of the flats. On discovering the execution of the 2014 transfer, they served notice on Batin in 2018 requiring the transfer of the freehold to their nominee purchaser, the first respondent, Prescott Place Freeholder Ltd. Batin failed to comply.
The findings below
In light of Batin’s non-compliance, the tenants issued proceedings in the county court for a section 19 order. The appellant was not a party to those proceedings. Although he applied to be joined, his application was refused as it was made late. A section 19 order was made by the court with an order for the terms of acquisition to be determined by the First‑tier Tribunal.
In February 2020, the tenants applied to the FTT for a determination of the purchase price payable for the transfer to PPF. Although aware of the proceedings, the appellant did not apply to be joined and the tenants made no such application.
In November 2020, the flats were marketed for sale. The tenants issued proceedings in the High Court for an injunction to restrain Batin from disposing of the same and an injunction prohibiting the appellant from registering any interest or leases granted by Batin. The appellant applied to be joined to these proceedings.
Notwithstanding the existence of the section 19 order, in reliance on the 2004 trust deed and a further trust deed purportedly executed in 2014, the appellant counterclaimed for a declaration that he had been granted equitable leases of the flat prior to the section 19 order being made.
Critical of the appellant’s conduct, the High Court found that the 2014 trust deed and the equitable leases were executed after the section 19 orders were made. Further, it found that the appellant’s reliance on his purported beneficial interest in the premises amounted to an abuse of process in the Henderson v Henderson sense. Additionally, the High Court found that the section 19 order constituted an interest in land the moment it was made.
The appeal
The Court of Appeal was also highly critical of the appellant’s conduct. Yet, it found his reliance on the purported beneficial interest was not an abuse of process. The leaseholders had not sought to join him to the earlier proceedings and it was not incumbent on the appellant to apply to be joined. The leaseholders should have joined the appellant to the county court proceedings if they wanted to bind him to the section 19 order. Further, the appellant’s beneficial interest in the premises was irrelevant to the issue of whether a section 19 order should be made. To protect their position on joining the appellant, the tenants should also have sought directions from the court under section 12B(5).
In respect of whether a section 19 order created an immediate equitable interest in land, the Court of Appeal found it did not. Section 14(1) gave leaseholders an absolute right to withdraw from the acquisition even after a binding contract had been reached. It cannot have been intended that a section 19(1) order would give rise to an immediate equitable interest in the land.
Elizabeth Dwomoh is a barrister at Lamb Chambers
Photo © Mathias Reding/Pexels
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