Artist Court Collective Ltd v Sardar Muhammad Ishaq Khan [2016] EWHC 2453 (Ch)

A landlord of a block of flats in London (Khan) has succeeded in his appeal against an order which required him to sell his property for no consideration to Artist Court, a company set up by his residential tenants.

The case relates to the rights of first refusal conferred on qualifying tenants of residential flats in a building. These are enshrined in Part I of the Landlord and Tenant Act 1987 (as extensively amended) and are triggered when the landlord intends to make what is called a relevant disposal.

The landlord had in 2011 entered into a deed of trust with SGR, a company set up by him and of which he held a controlling interest. A few days later the landlord transferred the property to SGR for £225,000. His intention was to keep the beneficial interest in the property such that all SGR ever acquired was the legal title impressed with the trust. In 2013 SGR transferred the property back to the landlord for nil consideration.

The tenants took issue with the fact that these steps were taken without observing the requirements of the 1987 Act. They asked that the landlord make good the default by transferring the property to them for nil consideration (in line with the most recent transfer).

The County court decided that the landlord was a purchaser of the property pursuant to the deed of trust and/or 2013 transfer, that a relevant disposal had been made and that this disposal was not exempt. To remedy the default the landlord was ordered to transfer the property (including the retail units on the ground floor) to Artist Court for nil consideration and pay to it all sums it had received in rent from those retail units and the residential tenants from the date of the 2013 transfer. A not insignificant sum of £52,000.

The landlord appealed on a number of grounds in the hope of overturning the order compelling it to transfer the property, or, if not, at least removing the retail units from the property to be transferred and reducing the sums ordered to be paid.

In granting the appeal, the High Court reconsidered the deed of trust and saw this, not as a deed superseded by the later contract and transfer but part of the transfer. The deed itself could not be viewed as a relevant disposal triggering the 1987 Act.

Further, the 2013 transfer was found to be an exempt disposal (i.e. one that did not trigger the rights of first refusal) pursuant to section 4(2)(g) which applies to the transfer of an estate or interest held on trust for any person. The judge found nothing in the language of that section prevented its application to a situation such as this where the legal estate in property held on trust for a beneficiary is conveyed to the beneficiary, thereby terminating the trust and discharging the trustee.

Key points:

  • Permission to appeal was granted by the Court and there may be more to come on this case.
  • Investors may wish to change their corporate structure to aid the management of their assets (here the landlord wanted to raise funds to buy other property) but care should be taken not to inadvertently dispose of residential property and trigger the 1987 Act with the consequences that entails. Here, had the appeal failed the landlord would a have been obliged to transfer a property worth between £225,00 - £500,000 for nil consideration.
  • Remember also that a landlord could be guilty of a criminal offence under the 1987 Act if it fails, without reasonable excuse, to follow the procedure enshrined in the Act.
  • The Judge considered in this case that the appropriate construction of the section 4(2)(g) exemption was one which forms part of a coherent legislative scheme. Whilst this is a sentiment that is difficult to argue against, and could well be found on further appeal to be correct, there are plenty of instances where the judicial interpretation of the 1987 Act has not made a huge amount of practical sense, this largely being down to the Act being so outdated, and not intended to capture many of today’s mixed use development structures