Safe As Houses? Know Your Rights!

SAFE AS HOUSES? KNOW YOUR RIGHTS!

by

Damian Greenish

Damian Greenish was born in London in 1950. Educated at Harrow and Warwick (where he read Economics) he qualified as a solicitor in 1979. He became a partner in the Knightsbridge firm of Lee & Pembertons in 1980 and subsequently was Head of the Property Department. Since 1 November 2000 he has been senior partner of the successor firm Pemberton Greenish.

He specialises in the area of residential landlord and tenant with particular emphasis on leasehold enfranchisement. He acts for a number of major London landed estates. He is a Trustee of the Sloane Stanley Estate, which is a mixed-use landed estate in Chelsea. In addition, he advises a number of property companies and institutions on enfranchisements matters. He also acts for a substantial number of tenants seeking to exercise their rights both under the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993. He has wide experience of the courts and tribunals in relation to enfranchisement matters where he has represented both landlords and tenants.

Over the years he has lectured on leasehold reform and has written several papers on the subject. He is the co-author of the Third and Fourth Editions of “Hague on Leasehold Enfranchisement” published by Sweet and Maxwell. The First Supplement to the Fourth Edition is due to be published by the end of April 2005.

PEMBERTON GREENISH

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SAFE AS HOUSES? KNOW YOUR RIGHTS!

Introduction

1.I am not sure that I fully understand what it is I am expected to cover in the context of this title. However, what I have decided to do is to look very broadly at several pieces of legislation which might be thought to affect “houses” and “rights” over them. In the time available it really will need to be an overview but I think it is a useful exercise for two particular reasons.

2.There is a popular misconception that, because this legislation refers to “houses”, it affects exclusively residential property. Some of you here today are commercial property litigators and will already be thinking that you can relax during this particular session, as “it won’t affect what I do”. Well I am afraid that you are wrong. That would be a mistake; this legislation has considerable application to mixed-use property and there are plenty of commercial property specialists that have learned that lesson the hard way.

3.Secondly, this legislation is an extraordinarily fruitful area for litigation. For example, the Leasehold Reform Act 1967, whilst not a statute of great substance (it comprises some 41 sections and 7 schedules) has punched well above its weight in the litigation stakes. It has been the subject of at least five cases in the House of Lords and numerous decisions of the Court of Appeal. Only last month a petition for leave to appeal to the House of Lords was refused in a case concerning the 1967 Act.

1. So what are these Acts? The first is the Leasehold Reform Act 1967. This Act allows the tenant of a leasehold house, who fulfils certain qualifying conditions, to acquire a freehold or an extended lease of that house. As we shall see, what is meant by house is by no means straightforward and has been the subject of considerable judicial attention. Secondly, there is the Landlord & Tenant Act 1987, which gives tenants of certain premises a statutory right of first refusal in the event of a landlord making a disposal. Thirdly, there is the Leasehold Reform, Housing and Development Act 1993. This allows the tenants of a block of flats acting collectively, compulsorily to acquire the interests of their landlord. It also allows the tenant of an individual flat to claim an extended lease of that flat. Finally, I will look at that part of the Commonhold and Leasehold Reform Act 2002 which introduced a “right to manage”.

1. What is interesting about all these pieces of legislation is that they all have application to mixed-use buildings. There is an argument (at present untested) that the 1967 Act might, in certain circumstances, apply to a building that is wholly in commercial use; I am not wholly convinced by that but it is an interesting argument.

Leasehold Reform Act 1967

1. This Act gives to the tenant of a leasehold house, which he holds under a long lease and which he has owned for a period of at least two years, the right to acquire the freehold at a price calculated in accordance with the provisions of section 9 of the Act. At one time it was also necessary for the property to be within certain financial limits, for the lease to be at a low rent and for the tenant to fulfil a residence test. All that has now largely (but not entirely) been abolished.

1. Looking at the rules of qualification there are three basic questions that need to be answered. First does the building qualify? Secondly does the lease qualify? Thirdly, does the tenant qualify?

1. In order for the building to qualify, it must be a “house”. Not, you would have thought, a very difficult proposition. However, the question of what constitutes a house for the purpose of this Act has itself been the subject of three cases before the House of Lords[1].

1. Section 2 (1) of the Act provides:-

“For the purposes of this Part of this Act, “house” includes any building designed or adapted for living in and reasonably so called, notwithstanding that the building is not structurally detached, or was or is not solely designed or adapted for living in, or is divided horizontally into flats or maisonettes; and -

(a) where a building is divided horizontally, the flats or other units into which it is so divided are not separate “houses” though the building as a whole may be; and

(b) where a building is divided vertically the building as a whole is not a “house” though any of the units into which it is divided may be.

1. The first point that is obvious from this definition, is that the Act does not apply simply to a single private dwelling in one occupation. “House” has developed a wide definition and can, for example, include a shop with a flat over or a building converted into flats.

1. It should be noted that the premises must be “designed or adapted for living in”. This is an issue of user. Before the general abolition of the residence test, this particular part of the definition caused no difficulty. The reason is obvious; the tenant necessarily had to live in the building. However, now that the residence test has been removed, the question as to what is meant by a building “designed or adapted for living in” becomes less self-explanatory. For example, does a building that was originally designed for living in but is now used for some other purpose (eg an office) nevertheless remain in this part of the definition? My view is that what is required is that some part of the building at the date that the claim is made must be capable by design or adaptation of being occupied as a residence. However, the contrary is certainly arguable.

1. The lease must comprise the whole of the “house” and it must be a long tenancy, i.e. a lease with an original term of more than 21 years. However, if it is a business tenancy then it will not qualify at all if it is for an original term of 35 years or less.

1. The tenant must have owned the lease of the house for a period of at least two years before the date of the claim. At one time, there was also a residence test but that has now been abolished save in limited circumstances. If a house is subject to a business tenancy, or if the house comprises flats, one or more of which is subject to a qualifying lease under the 1993 Act, then the tenant is still required to fulfil a residence test, then the tenant is required to have lived in the house as his main residence for a period of at least two years.

1. The 1967 Act has three different valuation methods. As to which one applies depends on the qualifying criteria. Valuation is outside the scope of this talk but specialist valuation advice should always be taken.

1. The 1967 Act also allows a tenant of a house to take an extended lease for a term of 50 years to expire after the term date of the existing lease at a “modern ground rent” throughout the extended term and without payment of a premium. The right is now little used, not least because, in order to claim the extended lease, it is generally necessary to fulfil the original 1967 Act qualifying conditions. However, if you are faced with one of these extended leases, do not be fooled by the expression “modern ground rent”. It is by no means a nominal sum and certainly within central London can be a substantial figure.

Landlord & Tenant Act 1987

16.This Act was rushed through Parliament shortly before the 1987 General Election by a Government keen to be seen to be tackling the well-publicised problems of lessees in large mansion blocks, many in key constituencies in central London. There was, no doubt, a view that it could be “tidied up” once on the statute book but this has not occurred. The Act has been amended over the years but, in a world of stiff competition, it probably remains one of the most appallingly drafted pieces of legislation of all time. It has been the subject of considerable judicial criticism with Sir Nicolas Browne-Wilkinson famously referring to the difficulty “in construing such an ill-drafted, complicated and confused Act as this”[2]. Staughton LJ questioned whether Part 1 of the Act was “worth the paper it is written on”[3] and Sir Thomas Bingham MR was scathing in his criticisms of the Act, pointing out that “the legal profession would appear to be the main beneficiaries of the obscure statute”[4]. I can hope that many of you have been.

1. So what does this notorious piece of legislation seek to do? Part 1 of the Act grants to a requisite majority of qualifying tenants of flats within premises to which the Act applies, a statutory right of first refusal. It does so in a negative way, by prohibiting the landlord from making what the Act calls “a relevant disposal” without first serving a notice and requiring that the disposal is made in accordance with the statutory requirements. It was put rather more plainly by Staughton LJ when he said that the purpose of Part 1 of the Act was “to enable tenants of flats to buy their landlord’s interest in the building if the landlord proposed to sell it to someone else and to buy it from the purchaser if the landlord had actually done so”[5].

1. Subject to exceptions, Part 1 of the Act applies to premises if three conditions are met. They must (a) consist of the whole or part of the building, (b) contain two or more flats held by “qualifying tenants”, and (c) have such number of flats held by qualifying tenants which exceeds 50% of the total number of flats contained in the premises.

1. One particular problem is that the Act does not define “building”. In the case of a row of terraced buildings, each divided vertically from each other, it is considered each vertical building is a separate building for the purpose of the Act even though it is attached to its neighbour. If the landlord is disposing of more than one building, each building has to be dealt with separately. However, if flats within the terrace straddle more than one building then the building will comprise the smallest property that can be divided vertically from its neighbours.

1. The Act does not make express provision for the common situation of an estate, comprising a number of blocks, being disposed of together as a single entity. Until recently, it was considered that, however inconvenient, each building should be dealt with separately, notwithstanding that each block might have rights over common roads, gardens, grounds etc. It has, however, recently been held[6] that more than one building can be the subject of a notice under the 1987 Act, if the occupants of the qualifying flats in each building share the use of the same appurtenant premises. It has to be said that this decision was controversial and has been the subject of academic criticism[7].

1. The premises must contain two or more flats held by qualifying tenants and the number of flats held by qualifying tenants must exceed 50% of the total number of flats in the premises.

1. There are two important exceptions. The first relates to mixed-used buildings. The right of first refusal will not apply to premises which would otherwise fall within the definition if two conditions apply. The first condition is that a part or parts of the premises is or are occupied or intended to be occupied otherwise than for residential purposes. The second condition is that the internal floor area of those parts taken together exceeds 50% of the internal floor area of the premises taken as a whole.

1. The other exception is that the Act does not apply at any time when the interest of the landlord in the premises is held by an exempt landlord or a resident landlord. There is a long list of exempt landlords set out in the Act who are principally public authority bodies.

1. The landlord for the purpose of the Act is the immediate landlord of the qualifying tenants of the flats contained in the premises. It follows that, if there is an intermediate headlease between the freeholder and the qualifying tenants, then any disposal of his interest by the freeholder will not be caught by the Act. There is one notable exception to that and that is if the intermediate landlord has a tenancy for a term of less than seven years.

1. The basic rule is that a person is a qualifying tenant for the purpose of the 1987 Act if he is the tenant of flat under a tenancy. There are a limited number of types of tenancy which are excluded and these include a business tenancy under Part 2 of the 1954 Act, a service tenancy and an assured tenancy. Otherwise, all tenancies are included in the definition of a qualifying tenant including, in particular, regulated or statutory tenants under the Rent Act 1977. It would seem that high value market lettings (which would not be assured tenancies because the rents exceed £25,000 per annum) would also be qualifying tenants for the purpose of the Act.

1. A requisite majority of qualifying tenants means the qualifying tenants of flats within the premises with more than 50% of the available votes. As to what is the total number of votes depends on which particular procedure is being considered.

1. The 1987 Act applies where there is a “relevant disposal”. Disposal has a wide meaning and includes the disposal of any estate or interest (whether legal or equitable). It is the creation or transfer of such an estate or interest and includes the surrender of a tenancy and the grant of an option or right of pre-emption. It also includes a contract to create or transfer an estate or interest in land.

1. There are a list of “excluded” disposals which do not initiate the right of first refusal. One is the grant of tenancy of an individual flat. Another is the grant of a mortgage. Others include the appointment or discharge of trustees and certain transfers by way of gift. A disposal in pursuance of a contract, option or right of pre-emption is not a relevant disposal but of course as we have seen that the contract is.

1. Perhaps the most commonly used “excluded” disposal is one made by a corporate body to a company which has been an associated company of that body for at least two years. The sale of shares in the company that owns a property is also not a “relevant disposal”.

1. My experience is that this is one of the least understood pieces of legislation affecting mixed-use property. It is, I suspect, breached on numerous occasions in that disposals regularly take place which are relevant disposals for the purpose of the Act, where the right of first refusal is not first offered. If that happens then there are provisions in the Act to allow the tenants to acquire the interest that has been disposed of from the new owner. There are quite complex conditions as to how the compensation is determined in such circumstances; suffice it to say that they are not generally in favour of the landlord.

1. To take three particular examples of common breaches. The grant of a lease to a telecommunications company of roof space for the purpose of erecting an aerial on a building to which the Act applies is a relevant disposal and thereby subject to the provisions of the Act. If a headlease of a building to which the Act applies is extended through the mechanism of a surrender and re-grant, then that surrender (or the contract for it) will be a relevant disposal. The grant of a lease of space within a building to which the Act applies, which constitutes common parts of that building, would again be a disposal to which the Act applies.

1. I suspect that there are many such disposals that take place without the procedures under the 1987 Act being invoked. So what, you may say. Well, so a lot I say. It is a criminal offence for a landlord, without reasonable excuse, to make a relevant disposal affecting premises to which Part 1 of the Act applies, without serving an offer notice or in contravention of any prohibition or restriction imposed by the Act. I am not aware of any prosecutions, which must in any event be brought by the local housing authority. However, that does not diminish the seriousness of the consequences for a landlord who fails to comply with his statutory duty.

Leasehold Reform, Housing and Urban Development Act 1993