Tenants of long leasehold flats have a number of statutory rights. They have a right of pre-emption if the landlord makes a relevant disposal, and they have a separate right of collective enfranchisement to acquire the landlord's interest in the property. In addition, a qualifying tenant of a flat also has the individual right to acquire a new long lease of the flat from his landlord. The question raised in this case was whether a tenant of premises which included a flat, but which also included property other than flats, could claim a new lease of the flat.
In each of the two cases which made up this conjoined appeal, the majority of a building had been let under a headlease. In one case, the building comprised six storeys; the lower three of which were used as offices, and the upper three consisted of a maisonette (which had been subject to an assured shorthold tenancy, but was now vacant). In the other case, the building contained five residential flats; the upper three were subject to long underleases, and the lower two were let on assured short-hold tenancies. The head tenant in the first case was claiming a new lease of the maisonette. In the second case, the claim related to the lower two flats.
The House of Lords considered the matter in a number of stages.
At the first stage it considered the language used in the Leasehold Reform, Housing and Urban Development Act 1993, which is the statute conferring the right to a new lease. Having reached the conclusion that the wording of the Act allowed the head lessees to make a claim, the court went on to consider arguments of public policy put forward by the freeholders as to why the Act should not apply in these circumstances. These were essentially that the statute was intended to benefit owner occupiers, and not property investors.
The court disagreed. The residence requirement which had previously existed (whereby the tenant had to have occupied the flat as his principal residence for three out of the last 10 years) was abolished by Parliament in 2002. It was replaced by a requirement that the tenant must simply have owned the lease for two years before making a claim.
This opened the way for non-resident tenants (including buy-to-let landlords) to claim new leases. The Act had been introduced to deal with the problem of leaseholds being a wasting asset, and this was as much of a problem for investors as for owner occupiers. The Act provides for compensation to be payable to the freeholder, so there was no reason why the right claimed should be contrary to public policy.
Finally, the court looked at whether it would be practical to apply the provisions of the Act to the grant of a new lease in these circumstances. A number of difficulties had been identified by the freeholders. These included:
- How to determine the extent of the demise under the new lease
- How to adapt the terms of the headlease to make it suitable for use as a lease of an individual flat
- The fragmentation of ownership which would result from a new lease being granted in these circumstances, since the head tenant would then hold its interest in the building under two separate leases: the headlease (excluding the flat), and the flat lease
- How to apportion the rent payable under the headlease
- How to grant easements in the flat lease (since the tenant of the flat lease and the tenant of the common parts would be one and the same person)
- How to deal with repairing obligations in the flat lease (since the head tenant, not the freeholder, was responsible for repair of the building by virtue of the headlease).
Nonetheless, the court felt that none of these difficulties was insuperable, and that they could be addressed by the Leasehold Valuation Tribunal on a case-by-case basis.
Things to consider
The opportunity to apply for a new lease of a flat contained in a headlease of larger premises will usually only be of benefit to a head tenant where the headlease has (in headlease terms) a relatively short period of time left to run. The right under the Act is to a new lease for a term expiring 90 years after the end date of the existing lease. The headleases in this case were only about 60 years, so there was a considerable advantage in buying another 90. Where head tenants hold buildings under 999 year leases, there will be little cause to use the provisions of the Act. Another point worth mentioning is that, under the Act, there cannot be more than one qualifying tenant of a flat at the same time. This means that where a flat has been sublet on a long lease, the head tenant will not be able to take advantage of the right to a new lease of that flat.
Earl Cadogan v 26 Cadogan Square Ltd; Howard de Walden Estates Ltd v Aggio