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Leasebacks – what is the landlord entitled to?

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24th April 2014

When a landlord retains a flat in a block which is subject to a collective enfranchisement claim, he can claim a leaseback of it. However, unless the landlord is a local authority or housing association, the landlord must make sure that a leaseback is proposed in its counter-notice, otherwise the right will be lost.

The statutory framework

The optional leaseback provisions are contained in s.36 and Part III of Schedule 9 to the Leasehold Reform Housing and Urban Development Act 1993. They apply either:

• to flats or other units which are not let to a qualifying tenant immediately before the “appropriate time”; or
• where immediately before the freehold of the flat or unit is acquired by the nominee purchaser, the flat or unit is occupied by a resident landlord who is also a qualifying tenant of it.

The “appropriate time” means the time when the freehold of the flat or other unit is acquired by the nominee purchaser – Sch. 9 para 1 (1). The issue of whether the landlord is entitled to a leaseback and, if so, of what, will need to be determined before the freehold is acquired by the nominee purchaser. This, therefore, leads to the curious position that the “appropriate time” will inevitably be in the future when that determination is made. The time lag between the date of service of the counter-notice and the “appropriate time” can give rise to some interesting problems.

Proposals for the leaseback must be in the counter-notice

In Cawthorne v Hamdan [2007] EWCA Civ 6, the property comprised six flats in Hove, East Sussex. The qualifying tenants gave notice to the landlord to exercise their right to collectively enfranchise and the landlord served a counter-notice in reply. The requirements for a good counter-notice are contained in s. 21 of the Act and require a notice which admits the claim to state “any additional leaseback proposals by the reversioner” – s. 21 (3)(a)(ii).

The landlord would have been entitled to a leaseback of one of the flats in the building but the counter-notice contained no leaseback proposals. It was only once the case reached the LVT for a determination on the price that the landlord finally woke up and served a leaseback notice. The landlord argued that, because the relevant date for determining whether a landlord was entitled to a leaseback was the “appropriate time”, which had not yet arrived, a leaseback notice could be served at any time before the acquisition. The nominee purchaser’s case was that the notice was too late and the right had been lost. The Court of Appeal rejected the landlord’s argument and agreed with the nominee purchaser. It held that the requirements of s.21(3) are mandatory and, if the landlord wants a leaseback, it has to say so in its counter-notice.

What is included in the unit?

The Upper Tribunal has also grappled recently with the problem of leasebacks in the case of Tibber v Buckley and Wilcox [2014] UKUT 0074 (LC), a case in which the writer represented the respondent. Here the building consisted of three flats within a converted Victorian terraced house. The landlord had retained the top flat and sought a leaseback of it. The counter-notice included proposals for a leaseback of the following:

“…the second and third floors of 32 Petherton Road aforesaid…(including all roofs and windows therein) and the staircase leading thereto from the first floor on the attached plan marked ‘C’…”

In the LVT, the landlord expanded what she wanted by way of leaseback to include the whole of the structure and exterior of the top flat, the front garden, part of the communal landing between ground and first floor level (the mezzanine) and indeed, at one point, all the common parts of the building!

The issue therefore arose as to what the landlord was entitled to a leaseback of. What was the extent of the unit?. “Unit” means (a) a flat; (b) any other separate set of premises which is constructed or adapted for use for the purposes of a dwelling; or (c) a separate set of premises let, or intended for letting on a business lease – s. 38(1). Paragraph 1(2) of Schedule 9 provides that the unit or flat will also include “any yard, garden, garage, outhouses and appurtenances belonging to or usually enjoyed with it and let with it immediately before the appropriate time”. Again, the appropriate time is in the future. Neither the mezzanine nor the front garden two floors below the flat were enjoyed or let with the top flat at the time of the hearing and the LVT found that the “unit” was just the flat. It also found that the structure and exterior of the flat could not be the subject of the leaseback because they were not part of the unit.

The Upper Tribunal agreed with the LVT but went further. It held that, in any event, the appellant was bound by the terms of the counter-notice and that counter-notice had not made claim to either the mezzanine or the front garden. Again, it was stressed that the statutory language is mandatory and, if the landlord fails to clearly specify in detail her leaseback proposals in the counter-notice, the opportunity is missed. (Permission to appeal has been sought).

When is a unit not a unit?

Even if the counter-notice does propose a leaseback, what happens if the unit which is to be the subject of that leaseback does not exist when the notice is served, but does exist at the “appropriate time”?

This was one of the issues which arose in the case of Barrie House (Freehold) Ltd v Merie Bin Mahfouz Company (UK) Ltd LON/00BK/OCE/2011/0161 – a case which raises many questions in relation to leasebacks including what constitutes a unit, when must the unit exist and whether a unit can be created out of common parts.

Barrie House originally had a spacious and pleasant entrance hall with a grand sweeping staircase in the “Bauhaus flyaway style”. Shortly after the notice of claim was served by the nominee purchaser, the landlord walled in part of the staircase and began construction of a new flat which incorporated about a quarter of the entrance hall. On the date when the notice of claim was served (“the relevant date” – s. 1(8)), the flat was not completed and it was accepted that it was not, at that point, a “unit” for the purposes of the Act. However, by the time the application for a determination of whether the landlord was entitled to a leaseback of the new flat reached trial, the flat was complete and the “appropriate time” had still not arrived.

The nominee purchaser was represented by Chris Heather (of Tanfield Chambers) who submitted that the landlord was not entitled to a leaseback of any property which, at the relevant date, was wholly within or which included any of the common parts of the building. He also said that the landlord was not entitled to a leaseback of any property which was not a “unit” within the meaning of the Act when the notice of claim was served. Philip Rainey QC (also of Tanfield) argued that the landlord’s right to a leaseback depended solely on whether the property was a unit which was not let to a qualifying tenant at the “appropriate time” and that, until the “appropriate time” (which was still to come), the landlord was entitled to form units, whether or not such units incorporated common parts of the building, and to grant leases of those units to non-qualifying tenants to which it would be entitled to a leaseback when the freehold was acquired by the nominee purchaser.

The First Tier Tribunal concluded that, to be the subject of a leaseback, the unit must exist at the date of the notice of claim as well as at the appropriate time. It said the landlord cannot create units between these two dates and require them to be leased back to him. The Tribunal also found that it was not open to the landlord to incorporate in a unit parts of the building which the tenants sought to acquire and which were, at the date of their notice of claim, a common part of the building. Similarly it could not require a leaseback of common parts which existed at the date of the notice of claim, whether or not such common parts were at that date a unit. If, however, the unit had already been created out of the common parts (without substantially interfering with the tenants’ rights under their leases) before the notice of claim was served, the landlord would have been entitled to a leaseback of it.

Conclusion

The counter-notice served by a landlord under s. 21 of the Act must contain his leaseback proposals. However, under Para 5(1) of Schedule 9, those proposals must relate to the leaseback of a unit which is not let to a qualifying tenant “immediately before the appropriate time”. As the counter-notice will be served before (and in a disputed case potentially months or years before) the appropriate time, the landlord appears to have a window of opportunity between the relevant date and the appropriate time to bring himself or a unit within the qualifying criteria for a leaseback. The LVT in Barrie House looking at the Act as a whole and its aims found that there is no such window but it will be very interesting to see what the Upper Tribunal thinks when the Appeal in that case is heard by it in May 2014. The decision is likely to be essential reading in relation to the many knotty problems that can arise in relation to leasebacks.

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