Bernard D’Monte, a property litigator, considers a recent Court of Appeal decision in which he acted for the head tenant 26 Cadogan Square Limited

The basic position

The Leasehold Reform, Housing and Urban Development Act 1993 enables residential leaseholders to obtain extended leases of their flats or to join with other long leaseholders to collectively purchase the freehold of the building.

To ‘qualify’ for an extended lease, a tenant of a flat has to hold a long lease for a term in excess of 21 years, for two years, the premises have to be a flat, i.e. constructed or adapted for the purposes of a dwelling, and must be occupied for residential purposes. Business leases are exempt.

Prior to 2002, the tenant also had to reside in the flat for a specified period. That requirement was removed by the passing of the Commonhold and Leasehold Reform Act 2002.

A tenant with a long lease of a single flat need not be concerned, because the ability to obtain a lease extension is relatively easy to engage.

The removal of the residence requirement was seen as a significant step by Parliament because it opened the door to a new class of tenant/investor being able to obtain extended leases and to participate in collective claims for the freehold.

A new class of enfranchising investors

It is the new class of tenant/investor which has raised the issue of whether a headlessee was entitled to obtain a new lease of part of a building. This issue came under the scrutiny of the Court of Appeal recently in two conjoined cases: Howard de Walden v Les Aggio and Others and Earl Cadogan and Cadogan Estates v 26 Cadogan Square Limited. The decision overturned the first instance decision in Maurice v Hollow Ware Products Limited [2005] with the result that headlessees were no longer entitled to obtain extended leases of a flat or flats held under a headlease.

In the Cadogan case, the headlease demised a large flat, commercial premises, internal common parts and external areas for parking. The headlessee, 26 Cadogan Square Limited, was seeking a lease extension of just the flat.

In the Howard de Walden case the headlease demised five residential flats, three of which were let on long leases with common parts and external areas for parking. The headlessee sought a lease extension in respect of two flats retained (and not held on long leases).

In both cases, the headlessees served notices of claim under Section 42 of the 1993 Act and in both instances the superior landlords served counter-notices not admitting the two claims in similar terms i.e. that the 1993 Act was not intended to apply in the case of a headlease of the whole premises which includes a flat or flats and common parts.

Can a headlessee obtain a lease extension?

At first instance, the headlessees in both cases were successful and the court followed the decision in Maurice v Hollow Ware Products Limited [2005]. However, the court also granted the superior landlord’s permission to appeal to the Court of Appeal.

The issues on appeal were:

The headlessees’ arguments 

  • It was clear from Chapter II Part 1 of the 1993 Act that the right to a new lease was not confined to tenants whose long leases demised a single flat and only that flat. 
  • That a tenant should not be disqualified from entitlement simply because the lease demised a flat and other premises. 
  • Section 39(4) of the 1993 Act confirms that a tenant can be a qualifying tenant of two or more flats at the same time pursuant to a single lease and it was immaterial if the lease demised other premises

The landlords’ arguments 

  • The 1993 Act does not provide a mechanism for separation of the existing headlease into several parts. 
  • Parliament did not provide for extensive modifications to the existing headlease once a new lease has been granted. 
  • There are no provisions to apportion rent after the grant of the new lease. 
  • With regard to the new lease, where should the boundaries for the flat lie as between headlessee and landlord?

In short, the landlord submitted that the lack of machinery demonstrated that Parliament did not envisage that a headlessee has a right of individual lease extension.

No machinery for headlessees to extend

The Court of Appeal determined that a headlessee is not entitled to individual lease extensions. The rationale for that decision was that there was no express statutory reference to ‘headlessees’ in Chapter 2 of Part 1 of the 1993 Act. On the issue of statutory interpretation Lady Justice Arden likened the exercise to stargazing:

‘It is like looking at the sky on a starry night, and trying to decide whether one is looking at Orion’s Belt or some other constellation or indeed whether one of the stars is just a satellite’.

The clues available in this exercise of statutory interpretation were, as she put it, ‘opaque, sparse and somewhat distant’.

Ultimately, the absence of machinery in the 1993 Act and the difficulties caused by a headlessee being able to claim a new lease, led the Court of Appeal to conclude that the expression ‘qualifying tenant of a flat’ refers to a tenant of a flat who, when serving their notice of claim, is a tenant of that flat and that flat alone (whether under one or more leases). The one qualification from the Court of Appeal was that Section 62(2) of the 1993 Act would broaden that definition to include garages, outhouses, gardens, yards etc in appropriate cases.

House of Lords’ decision still awaited

The Court of Appeal decision has caused some problems for many practitioners, who until then, had negotiated terms to overcome the difficulties arising from the lack of machinery in the 1993 Act and have not regarded the absence of machinery as a problem.

At the time of writing, the issues arising in the Howard de Walden and Cadogan cases have been considered in the House of Lords and their decision has been reserved.

Key Points: The removal of the residency requirement in the process of qualifying for a lease extension has brought about a new class of tenants who are primarily investors. This has meant that headlessees have sought to explore the opportunity for acquiring lease extensions too.

The High Court said that headlessees were entitled to extenstions, the Court of Appeal said they weren’t – the matter has now been remitted to the House of Lords.