The recent case of BOH Limited and Layhawk Consultants Limited v Eastern Power Networks Plc (formerly EDF Energy Networks (EPN) Plc) [2011] EWCE Civ 19 highlights a number of interesting issues in relation to easements, the merger of leasehold and freehold interests and renewal under the Landlord and Tenant Act 1954.

The property background

The case concerns an area of land which has, as a southern boundary, a public highway. Each party owns a freehold of part of the land. Eastern Power Networks plc (EPN) owns an area referred to as Plot 2 upon which it operates an electricity sub-station, having been a tenant of Plot 2 under a 1953 lease which created a 42 year tenancy of Plot 2, and two other plots referred to as Plot 26 and Plot 31. Plot 26 is owned by Layhawk Consultants Limited (Layhawk). BOH Limited owns a plot referred to as Plot 20. Both plots lie between EPN's Plot 2 and the public highway, though EPN did not at any time lease Plot 20, EPN's rights of way over and to lay cables under Plot 20 had been granted in terms of the lease of the other plots.

The term of the tenancy had been due to expire on 23 June 1994, but since it was land occupied for business purposes, the tenancy was protected by the security of tenure provisions of the1954 Act. The notice procedure for termination had been instigated, but only in respect of Plot 2. In addition, EPN had served a counter notice on 3 September 1993 that it was not willing to give up possession on the termination of the tenancy.

The issue facing the Courts was whether EPN had: (i) rights of access and egress between Plot 2 and the highway over BOH and Layhawk's land; and (ii) a right to maintain cables in Plot 20 passing through Plot 26 to the sub-station on Plot 2. If EPN did have such rights by virtue of it being the tenant under the 1953 lease, did the acquisition of the freehold interest of Plot 2 then merge the leasehold interest with the freehold and thereby extinguished the tenancy? Or, did EPN's tenancy of Plot 2 continue in existence under the provisions of Part II of the 1954 Act?

The status of the leasehold rights

In the High Court, EPN argued that despite its acquisition of the freehold of Plot 2, its tenancy of (at least) Plots 2 and 26 created by the lease was still continuing under section 24 of Part II of the 1954 Act, because it had never been terminated in accordance with Part II. The court held this view to be correct. The fact that there were multiple different landlords over time did not mean that there were multiple tenancies, and in order to be valid a section 25 notice had to be given in respect of the whole of the property comprised in the tenancy. Further, where there are multiple landlords, all of them must give the section 25 notice for it to be valid. It was held that the section 25 notice was invalid because it only related to Plot 2 and not also to Plots 31 and 26, and because it was given by only one of the three landlords. The court also rejected an argument that because EPN had served a counter notice in response to the section 25 notice it was prevented from denying the validity of the section 25 notice.

The court then considered whether, when EPN acquired the freehold of Plot 2, its tenancy in Plot 2 merged in the freehold. If so, EPN's lease of Plot 26 may have continued, but EPN would not continue to enjoy rights of access over Plot 20 nor could it use its rights as a tenant in respect of Plot 26 to gain access to Plot 2.

The judge held that there could be merger of a leasehold and freehold interest where dealing with a part of a leasehold estate, including where the landlord's part had been split amongst multiple landlords. At common law a merger occurs automatically, as one person cannot be both landlord and tenant of the same land, but in equity you must consider the intention of the parties. There is a two part process in analysing this, and it is necessary to establish intention, and if there is no evidence of intention, it is still essential to consider whether a merger is in the interests of the person who is acquiring the freehold title.

The judge stated that if the other landlords have a genuine interest in the issue of merger, then their interest has to be taken into account in ascertaining whether the equitable presumption against merger is rebutted. The court considered whether the presumption against merger had been rebutted, noting that the burden of proof lay on BOH and Layhawk. Looking at the facts, there did not seem to be any intent to merge. EPN stopped paying rent but this was not fatal as EPN could have paid the rent to itself and EPN did not apply to the Land Registry to merge the interests.

Further, merger was to EPN's detriment as the freehold had no easements over Plot 20 and it was unlikely that EPN would have paid £237,500 for the freehold of Plot 2 if it would thereby lose its access and cabling rights over the adjoining plots. The judge concluded that there had been no merger.

Appeal

BOH and Layhawk appealed on the basis that the judge erred in finding on the facts that there had been no merger. A second ground of appeal was advanced under the Human Rights Act 1988 but this was not commented on by the Court of Appeal in any detail.

The appellants agreed that where there is a split in the landlord's title, all of the landlords need to join in the giving of a section 25 notice in respect of a termination of a tenancy of the whole of the premises. They contended, however, that the commercial interests of the party becoming freeholder and tenant may not be shared, and argued that on the acquisition of a separate freehold interest of part of the premises (and in the absence of evidence of intention to merge) there is a presumption of merger. The other landlords would become sole landlords in respect of the tenancy of the other parts and could together give a section 25 notice in respect of such parts.

The court held that the principles of equity had developed, so that in instances where there was no intention of merger, there was a presumption against merger, requiring the court to look at the interests of the party in whom the lease and the freehold title vested, rather than those of the other landlords. The appeal was dismissed.

Impact

It has been commented that BOF and Layhawk were perhaps trying to exploit potential ransom strips more than anything else. However, the case serves as a reminder that under common law a leasehold interest will merge automatically upon the grant of a freehold interest of the same land, and although the equitable rules now apply whereby there is no merger by operation of law which would not be deemed to be a merger in equity, it is important to consider at an early stage whether merger is intended. Parties should think carefully about what rights are required for the proper use and enjoyment of the property and cater for that in the documentation.

To view the decision in BOH Limited and Layhawk Consultants Limited v Eastern Power Networks Plc (formerly EDF Energy Networks (EPN) Plc) click here.