Leaseholders who exercise their collective right to acquire the freehold of their block of flats often do so, at least in part, to rid themselves of their freeholder, with whom relations have deteriorated beyond the point of no return.
In fact, it’s not necessarily the case that the freeholder’s influence will be removed entirely.
For example, the freeholder may seek to exercise its right to acquire a 999 year leaseback of any unit which is not let to a qualifying tenant of a flat in the building. This might include a commercial unit or a flat which is not subject to a long lease.
Further, where the claim includes not only the freehold of the building or part of a building containing the flats but also communal areas which fall outside the building, the landlord has the right to elect not to sell the freehold of that land, but instead to grant ‘such permanent rights’ over those areas, as will ensure the leaseholders ‘as nearly as may be the same rights as those enjoyed ... under the terms of [the] lease’ (i.e. to grant ‘permanent’ versions of the rights which the leaseholders already enjoy).
Where the freeholder successfully exercises this right, under s.1(4) of the LRH&UDA 1993 (‘the Act’), and the freeholder (rather than a third party management company) is responsible for maintaining and insuring these communal areas, the leaseholders may find (to their dismay) that they will continue to pay a service charge in respect of costs which are incurred by the freeholder, after the completion of their collective enfranchisement claim.
The terms ‘permanent rights’ and ‘as nearly as may be’ have given rise to a, perhaps surprising, amount of litigation. If the rights which the landlord proposes to grant instead of selling the freehold are not the ‘permanent’ equivalent of the rights which the leaseholders currently enjoy, the landlord may lose its rights under s.1(4).
In one case (Snowball Assets v Huntsmore House (Freehold) Ltd), the test of equivalence was held not to have been met, because the landlord had attempted to reserve a general right to develop or construct additional buildings within the communal area, which would have rendered the rights to use those areas ‘precarious’, rather than ‘permanent’.
In a recent case: The Corporation of Trinity House of Deptford Strond v 4 – 6 Trinity Church Square Freehold Ltd, the Court of Appeal considered a lease which granted the lessee a right ‘as Licensee only to use in common the garden’ and which went on to provide that ‘the Licence hereby granted may be revoked at any time’. The question was whether the landlord was obliged to offer the nominee purchaser an absolute and irrevocable right to use the garden.
The Court of Appeal found that it was so obliged. The freeholder’s rights under s.1(4) must be interpreted in the light of the Act as a whole. It is an alternative to the right of acquisition. A right which may be revoked at any time is not much of an alternative.
For leaseholders, this decision provides a useful reminder of an argument that may be deployed to defeat an unwanted attempt by the freeholder to retain ownership of external communal areas. For freeholders, the message is clear: think very carefully about the wording of the rights which you are proposing to grant, as an alternative to selling the freehold of the communal areas. As ever, sloppy drafting may cost you dearly.
Roger Hardwick is a Partner and Property Solicitor specialising in Residential Leasehold Property Law at Brethertons LLP
