Collective Enfranchisement: When can a freeholder/landlord retain the common areas?

News

The recent case of Snowball Assets v Huntsmore House (freehold) [2015] UKUT 0338 (LC) concerns a tenant serving a notice on the landlord to acquire the freehold of the building, together with the ‘additional premises’ (common parts), such as the gardens and driveway and, in this particular case, the leisure complex serving the flat. The landlord served a counter-notice on the tenant, conceding the tenant’s right in respect of purchasing the freehold for the building, but took issue with the price payable to acquire this, in addition to the tenant’s claim to acquire the freehold of the common parts (which the landlord wished to redevelop).

What does the Law say?

The law (subject to various qualifying criteria) provides that long leasehold tenants (of flats) have a collective right to purchase the freehold to the building and common parts. These rights are set out in The Leasehold Reform, Housing and Urban Development Act 1993, being the tenants’ ‘rights of collective enfranchisement’ and, when seeking to deny a tenant such rights, the landlord must satisfy the ‘equivalence test’ set out at Section 1 (4) of the Act. The statutory purpose of the test is to offer the tenant protection by ensuring that they are in a reasonably like position to that which they would have been, should they have acquired the freehold to common parts.

In the reported case, the landlord argued that under the terms of the existing leases, it had the right to undertake such redevelopment and was therefore entitled to retain the freehold to the common parts. They proposed (in an attempt to satisfy the equivalence test) to grant the tenant rights over the same, and further sought to argue that should the tenant be entitled to acquire the freehold to the common parts, they should pay £100,000.00 (as opposed to £10,000 directed by the First-Tier (Lands Chamber) (the FTT)) in recognition of such rights in landlord’s favour.

The FTT concluded that the tenant was entitled to acquire the freehold to the common parts, with the decision being upheld by the Upper Tribunal (Lands Chamber) (the UT) on appeal.

The UT considered 3 questions:

  1. Did the landlord have the right to withdraw rights from the tenants to use the common parts?

On construing the lease, the UT decided that the tenants enjoyed permanent (as opposed to precarious) rights to use the common parts, and could reasonably expect to have such rights. Further, the leases were granted in respect of flats in a new development, to include a garden and leisure complex, and if the tenants’ rights of use of these facilities were to be permanently withdrawn, the lease would need to expressly confer this right on the landlord. As the lease was silent on who had to the right to provide or allocate a facility, and also contained nothing to indicate who had the right to withdraw the provision or allocation of a facility, the lease failed to confer such rights on the landlord.

  1. Did the landlord have the right to redevelop the common parts?

The UT held that the landlord did not enjoy a general right of development in relation to the common parts and, particularly, the landlord did not have a right to carry out the proposed development (which was substantial) under the existing lease.

  1. Was the equivalence test satisfied?

The UT held that it was not. Although the landlord had offered rights to the tenant over the common parts in question, they were insufficient to satisfy the test. The UT maintained their finding in Fluss v Queensbridge Terrace Residents Ltd [2011], reiterating that permanent rights over common parts should be granted, equivalent to those rights enjoyed by the tenants at the time.

The law in practice:

A landlord would be unwise to assume that they will be entitled to retain the common parts for development purposes, and, in cases where a landlord envisages future development of the common parts and/or property, the reported case highlights the importance of providing such rights in the landlord’s favour at the point of drafting. The case makes clear that the lease will need to specifically reserve, and expressly state, such rights.

The case also illustrates the efficacy of the equivalence test set out in the 1993 Act in protecting the tenant’s rights of collective enfranchisement. To defeat the test, the landlord will need to strictly adhere to the enfranchisement regime set out in statute, and be able to offer the tenant equivalent rights.

Are you looking for legal advice and support? Our friendly and professional team offer a range of services and a fresh approach to challenges. Call us on 01792 655178 or email enquiries@bwl-law.co.uk.