An agreement for a lease extension entered into between a competent landlord and a tenant will be binding on an intermediate landlord, even where the intermediate landlord has given notice for separate representation.
A tenant of a long leasehold flat can acquire a new lease, effectively extending its term by 90 years from the end of the current lease term. The right to do this is contained in section 39 of the Leasehold Reform, Housing and Urban Development Act 1993.
The new lease is acquired from the 'competent landlord' - the first superior interest of sufficient duration to grant the extension. In practice there can be several intermediate landlords between the tenant who claims the lease extension and the competent landlord. Although an intermediate landlord will not grant the new, extended lease, it is interested in the terms of any new lease and will be entitled to a share in the premium of the new lease.
The 1993 Act states that the competent landlord can agree the new lease with the tenant. So long as the competent landlord acts in good faith and with reasonable care and diligence, the competent landlord will not be liable to an intermediate landlord for any loss arising from the exercise of the right to agree the terms of the lease.
Intermediate landlords are entitled to be separately represented from the competent landlord in any legal proceedings in which their title to property comes in question and/or in relation to the determination of any amount payable to them.
Until the decision of the Court of Appeal in Kateb v Howard De Walden Estates Ltd & Accordway Ltd  EWCA Civ 1176, it was not clear whether a competent landlord and tenant could agree a new lease that would bind the intermediate landlord where the intermediate landlord was separately represented.
In this case the tenant served notice to claim a new extended lease, the competent land served a counter-notice, and the intermediate landlord served notice to be separately represented. The parties struggled to agree a premium for the lease extension and the apportionment due to the intermediate landlord.
An application was made to the Leasehold Valuation Tribunal to settle this issue. Prior to the valuation hearing, and without the intermediate landlord, the competent landlord and the tenant agreed the premium for the extended lease and the apportionment that the intermediate landlord would receive.
The intermediate landlord sought to object to the agreed premium and apportionment, and a hearing was held at the First Tier Tribunal to determine whether the tribunal had jurisdiction to determine this issue and, if so, what the premium and apportionment should be. The First Tier Tribunal decided that the agreement between the competent landlord and the tenant was not binding. That decision was appealed to the Upper Tribunal and the Upper Tribunal overturned that decision. Then the decision of the Upper Tribunal was appealed to the Court of Appeal.
The Court of Appeal reached its conclusion that the intermediate landlord would be bound by an agreement reached between the competent landlord and the tenant, notwithstanding its entitlement to be separately represented. This was its reasoning:
- An intermediate landlord has a remedy against the competent landlord if it believes that the competent landlord has not properly represented its interests. The 1993 Act provides that an intermediate landlord can apply to the court for directions regarding how the competent landlord should act. Also, competent landlords have a fiduciary duty to protect intermediate landlords' interests. Accordingly intermediate landlords can claim against competent landlords where they act negligently or without good faith when entering into an agreement with a tenant.
- Comparable provisions in Part I of the Act (dealing with collective enfranchisement), explicitly grant an intermediate landlord the right to take part in negotiations. In his judgment Patten LJ argued that had Parliament intended a similar right to arise for intermediate landlords in relation to lease extensions, the relevant statutory provisions would have been included.
- The court's conclusion was not precluded by Articles 1 or 6 of the First Protocol of the European Convention of Human Rights.
What does this mean?
This is not a welcome decision for intermediate landlords. The remedies the court identified - an application to court for directions and/or a claim for damages in relation to a breach of fiduciary duty can be very expensive. An intermediate landlord's share in the premium for the new lease may be small which makes the prospect of litigation even less attractive.
However, it does provide helpful clarity for competent landlords although a competent landlord must bear in mind its statutory/fiduciary duties to an intermediate landlord as this case does not absolve them of those responsibilities.