Collective Enfranchisement Update

Revocable licence to use a communal garden converted into an permanent irrevocable right

On the 18th April 2018 the Court of Appeal (CA) handed down the decision of The Corporation of Trinity House Deptford Strond v 4-6 Trinity Church Square Freehold Limited [2018] EWCA Civ 764 an appeal from the Upper Tribunal (Lands Chamber) on the construction of section 1(4) of the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”).  The CA, by a unanimous decision, upheld the Upper Tribunal’s decision that the “requirement of permanence” imposed by section 1 (4) required the freeholder to convert the flat owners revocable licence to use a communal garden to an irrevocable right on the completion of the acquisition.

Background

Ashley Wilson Solicitors LLP acted for the nominee purchaser, 4-6 Trinity Church Square Freehold Limited (“the Nominee Purchaser”) in respect of the collective enfranchisement claim made by six of the ten flat owners to acquire the freehold of their building, 4-6 Trinity Church Square. The building consisted of three adjoining houses converted into ten flats. The claim was commenced on the 3 July 2015 (“the relevant date”) by the service of an initial notice on the freeholder, a maritime charity, The Corporation of Trinity House Deptford Strond (“the Freeholder”).

On the relevant date each of the ten flat owners of the building enjoyed common use of a rear communal garden which solely served the building and had been enjoyed since 1986 when the leases were first granted. The use was permitted by a licence contained in each lease which was expressed to be revocable at any time.

As entitled by the provisions of the Act, the Nominee Purchaser’s initial notice of claim sought to claim the freehold of the garden however the proposal was met by the Freeholder’s counter proposal that the Freeholder would retain the freehold of garden and grant the tenants and occupiers of the building a revocable licence to use the garden.

The flat owners licence to use the garden was subsequently revoked by the Freeholder and the only access door leading to the garden was locked to prohibit access.

The Law

Section 1(3) (b) of the Act allows the nominee purchaser to acquire “property which any such tenant is entitled under the terms of the lease of his flat to use in common with the occupiers of other premises (whether those premises are contained in the relevant premises or not).”

The right to acquire the freehold of the garden could however be satisfied by one of the alternatives in section 1(4):-

“The right of acquisition in respect of the freehold of any such property as is mentioned in subsection 3(b) shall, however, be taken to be satisfied with respect to that property if… either-

(a)    there are granted by the person who owns the freehold of that property –

(i)      over that property, or

(ii)      over any other property,

such permanent rights as will ensure that thereafter the occupier of the flat referred to in that provision has as nearly as may be the same rights as those enjoyed in relation to that property on the relevant date by the qualifying tenant under the terms of his lease;” 

There was no dispute that the Nominee Purchaser could acquire the garden. The dispute turned on the statutory construction of section 1 (4) and the nature of the future rights to be granted to the flat owners and occupiers of the building following the acquisition.

Permanent or Revocable Right to use the Garden 

The Freeholder’s Case  

The Freeholder argued that the Upper Tribunal decision was wrong and that “such permanent rights” should be considered in the context of section 1 (4) (a) and that the reference to “permanent rights” was to cater for the fact that the enfranchisement process required rights to be converted from leasehold rights to freehold rights which must be capable of lasting as long as any new long lease granted in the future.

It was submitted that ““Permanent” is indeed a relative term and is not synonymous with “everlasting”” and that there was nothing in the wording of section 1 (4) (a) to warrant a change in the quality of the rights granted under the leases. Thus, leasehold rights were to be converted to freehold rights however section 1 (4) was not sufficiently wide to require revocable rights to be converted into irrevocable ones.

Further, the Upper Tribunal was wrong to apply section 62 of the Law of Property Act 1925 to support its conclusion that temporary rights should be converted to permanent ones considering the current dissatisfaction with section 62.

The Nominee Purchaser’s Case

The Nominee Purchaser submitted that the Upper Tribunal decision was correct and emphasised that section 1 (4) must be interpreted in the context of collective enfranchisement process and Chapter 1 of the Act as a whole. At the end of the process the participating tenants have the ability to grant themselves leases of indefinite length and the Upper Tribunal was correct to find:-

“That formerly temporary rights should be replaced, on enfranchisement, by perpetual rights should not be regarded as an improbable result. First, because the whole purpose of the enfranchisement code is to replace the limited leasehold rights enjoyed by qualifying tenants with permanent rights; and secondly because the Act provides for landlords whose interests are diminished in value, or who sustain damage in respect of land other than the specified premises, to be compensated in the form of the premium payable by the tenants under Schedule 6.”

The wording of Section 1 (4) should be analysed in the context of Chapter 1 of the 1993 Act as a whole in particular taking into account section 34 (9) and Schedule 7.  When interpreting the provisions it was submitted that “it is obvious that as a result of the process which is envisaged, leasehold easements and rights will be translated into easements and rights included in the transfer of the freehold of the Building”

Further, it was emphasised that express reference in the Act to the conveyance not excluding or restricting the general words implied into conveyances by section 62 Law of Property Act 1925 was significant and the Act required the conveyance of the freehold to the Nominee Purchaser to include “such easements and rights over other property as are necessary to secure as nearly as may be for the benefit of the relevant premises the same rights as exist for the benefit of those premises immediately before the appropriate time”. 

Decision: Tenants entitled to a permanent irrevocable right

The Court upheld the Upper Tribunal decision that The requirement of permanence requires the revocable right to use the Garden to be converted into an irrevocable right on the completion of the transfer of the freehold of the Building.”

The Court of Appeal considered:

  • The conversion of temporary to permanent rights was not inimical to the statutory scheme essentially when interpreted against the background of the right to collective enfranchisement.
  • A permanent right granted under section 1 (4) is an alternative to the “right of acquisition” of the land.
  • When interpreting, the words “such permanent rights” together with “thereafter” and “ensure” in Section 1 (4) were indicative of a continuing, or perpetual state of affairs and the creation of irrevocable rights. The wording of section 1 (4) requires more than the continuation of the same revocable rights ““such permanent rights” means nothing less than it naturally suggests”
  • If the Freeholder was able to grant a revocable right it could immediately revoke the right after the transfer of the freehold which would be “in stark contrast to the right to have the freehold in the Garden acquired under section 1(2). It seems to me that such an interpretation gives no real meaning to either “permanent” or “permanent rights” at all.”
  • The conveyance of the freehold in a collective enfranchisement claim does not exclude or restrict the general words implied in conveyances by section 62 Law of Property Act 1925. If the licence to use the garden had not been revoked, the transfer of the freehold of the building would have passed with the Building the rights over the garden thus having the effect of converting the rights into irrevocable rights.
  • The power to make regulations by a freeholder in respect of retained land is acceptable provided the regulations are not sufficiently wide to contravene the requirement of permanence. The power to revoke a right altogether would be inconsistent with the requirement of permanence.

Comments on Case

The claim was met with strong resistance by the Freeholder from the outset by a difficult and aggressive counter notice disputing the flat owners’ rights to acquire certain parts of the building and proposing a premium of £2,300,000.00 over five times the agreed value of £440,000.00.

Although the freeholders apparent resistance to the flat owners statutory right to acquire the freehold had no bearing on the outcome of the case (which solely turned on the interpretation of section 1 (4)) we are delighted that common sense and justice has prevailed. The lock will be removed from the garden door on completion and the flat owners and occupiers of the building will indefinitely enjoy a permanent right to use the garden.

Overall, the use of a common facility by way of licence (incorporated in a residential lease) is rare and the unique facts of this case are unlikely to be repeated in other enfranchisement claims. However, the decision will be of interest to practitioners and flat owners seeking to interpret section 1 (4) generally and those parties involved in the government’s plans to reform the leasehold system and crackdown on unfair and abusive practices.

The decision of upholding the tenants’ rights will also provide comfort to flat owners considering making claims for their freehold who are concerned about a problematic freeholder resisting their claim.

Link to Judgement:-

http://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWCA/Civ/2018/764.html&query=(EWCA)+AND+(Civ)+AND+(764)


 

Joanna Botley

Ashley Wilson Solicitors LLP

19 April 2018

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