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Leasehold Enfranchisement: Freeholders Beware!

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Do you own the freehold of a block of flats? Do you own a building with two or more flats in it? If you answered yes to either question, is there a head lease in place between you as freeholder and the tenants of the individual flats? If the answer is yes again, you may be at risk of losing a potentially valuable asset.

In a recent decision of the Upper Tribunal (Lands Chamber) in June 2015,Trustees of the Alice Ellen Cooper-Dean Charitable Foundation –v- Greensleeves Owners Limited, a group of six tenants, in a building comprising of eight flats, managed to acquire the freehold of the building at no cost to themselves: in other words paying a premium of exactly £nil to the freeholder. Despite the freehold being valued at some £166,770, the freeholder was not entitled to any compensation for the loss, under the compensation provision of the Leasehold Reform, Housing and Urban Development Act 1993 (1993 Act) relating to collective enfranchisement.

How did this happen?

The factual background:

  1. The Trustees of the Alice Ellen Cooper-Dean Charitable Foundation (Trustees) were the freeholders of the building;
  2. The head lease was held by a management company whose shareholders were the tenants of the eight flats in the building;
  3. In 2012, six of the tenants were granted lease extensions of their individual flats, the lease extensions being at a peppercorn rent, replacing a ground rent of £300 per annum. The freeholder received a premium of £2,612 for each flat. The management company received £19,495  as compensation for their continuing liability for rent under the head lease, some £2,400 per annum. As a result of these lease extensions the head lease became an onerous contract as the ground rents received from the tenants had been reduced to considerably less than that payable to the Trustees;
  4. Later in 2012 the six tenants formed a company, Greensleeves Owners Limited (Greensleeves), and that company claimed to exercise the right to collective enfranchisement of the building i.e. to acquire the freehold of the building, and the head lease, for a premium of £1 for the freehold, £1 for the head lease and £1 for the garages and gardens etc.;
  5. Greensleeves argued that the premium payable to the Trustees was £nil because the head lease, as an onerous contract, had a negative value of some £201,900 and that this had to be set off against the value of the freehold (£166,770), when calculating the premium payable. As the negative value of the head lease exceeded the value of the freehold, and in accordance with the provisions of the 1993 Act, the correct premium payable to the Trustees was nil;
  6. The Trustees tried to argue that to deprive them of a valuable asset with no compensation payable was contrary to their rights under the Human Rights Act1998;
  7. The First Tier Tribunal (Lands Chamber), or Leasehold Valuation Tribunal as it was at the relevant time, agreed with Greensleeves and held that the premium payable to the freeholder was £nil and that the Human Rights Act 1998 did not give the Trustees a good defence. The Trustees appealed;
  8. The Upper Tribunal agreed with the First Tier Tribunal and dismissed the appeal.

Why?

The Upper Tribunal decided the “netting off” provisions of the 1993 Act were as claimed by the tenants and that any disadvantage to the freeholder could be avoided, or at least mitigated, by the freeholder making an application for compensation under Schedule 13 paragraph 5 of the 1993 Act, in the course of the tenants’ application for lease extensions earlier the same year. Although at that stage it might not be clear if a collective enfranchisement application would arise in the future, there must be a chance it would do so and that the freeholders asset would be devalued as a result. The case of Nailrile Limited –v- Earl Cadogan [2009] established that a freeholder confronted with a lease extension claim or claims was entitled to recover compensation to cover exactly this risk.

Protect yourself!

If you are a freeholder likely to face this situation, make sure you make a claim for compensation on any tenant’s application for a lease extension if appropriate.

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