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Raising the Roof: Roadblocks to Development

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5th June 2018

Rooftop developments are much easier to carry out with the cooperation of the existing tenants, but that is not always possible. Often the owners of the existing top-floor flat will not want a development above them and will do everything they can to prevent it.

Developers may wish to consider making general improvements to the building, which will not be passed on through the service charge, to help sweeten the deal. This is easier to do if the developer is the landlord, but if it is a third party there will need to be an agreement with the entity that manages the building (landlord, management company or right-to-manage (RTM) company).

The right of first refusal

If the landlord is going to dispose of the rooftop on a development lease, it must give serious consideration to whether that disposal would be a “relevant disposal” within the meaning of the Landlord and Tenant Act 1987 (the 1987 Act). If so, then it must give the right of first refusal to any qualifying tenants. This is a tricky area and fraught with technical difficulties.

A relevant disposal is a disposal by the landlord of any estate or interest (whether legal or equitable) in any premises to which the 1987 Act applies, including the disposal of any such estate or interest in any common parts of the building. Disposal includes the surrender of a tenancy and the grant of an option or right of pre-emption. The obvious example would be the sale of the freehold, but the grant of lesser interests, such as a lease of the common parts, would also be caught.

The first question to ask is whether it is worth avoiding the Act. If you are the landlord, and you are selling your interest in the roof to a developer, does it really matter whether a developer buys it to build out the flats or the tenants buy it to prevent development?

Common disposals that are relevant to rooftop schemes and are excluded from being relevant disposals under the 1987 Act are: the grant of a tenancy of a single flat (section 4(1)(a)); and a disposal to an associated company. There is a three-step procedure for avoidance: (i) creation of the associated company; (ii) transfer of the land to the associated company; and (iii) transfer of the shares in the associated company to the purchaser.

RTM companies

The Commonhold and Leasehold Reform Act 2002 (the 2002 Act) allows qualifying tenants of a block of flats to manage their own building, without the need to purchase the freehold under the provisions of the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act).

It might be argued that the RTM interferes with a landlord’s right to develop, assuming that it is retained land and is not demised to any of the tenants. In Francia Properties Ltd v Aristou and others[2017] PLSCS 229, the claimant landlord sought a declaration that it was entitled to construct a new flat on the roof of a building. The claim was opposed by the tenants and the RTM company that managed the building. The RTM company argued that the construction of the new flat would unlawfully interfere with the management functions exercisable by it.

The court gave judgment for the landlord and granted the declarations sought. The court held that the RTM company had management functions under sections 96 and 97 of the 2002 Act in respect of the roof, including keeping it in good repair, which would suffer a degree of interference by the construction of the new flat. However, parliament had not intended by the 2002 Act to compromise the landlord’s property rights, particularly in the absence of compensation. If acquisition of the RTM by an RTM company precluded a landlord from developing its property, that would in many cases cause a significant diminution in the value of that property. The tension is to be reconciled by permitting a landlord to carry out works providing it has taken all reasonable steps to minimise disturbance to the management functions of the RTM company. This is supported by the assessment of proportionality required by Article 1 of Protocol 1 of the European Convention on Human Rights.

Although this is only a county court case, it is the only reported decision on this point. The recorder gave permission to appeal to the Court of Appeal to the RTM company under the leapfrog provisions in the CPR but the appeal was withdrawn shortly before the hearing. For now, there are no more authoritative decisions.

Collective enfranchisement

The 1993 Act allows leaseholders to compulsorily purchase, through a nominee, the freehold of the block and thereby deprive the landlord of its asset altogether. The price to be paid for the block is determined in accordance with a valuation exercise prescribed with the 1993 Act. As is commonly the case with statutory valuations, the exercise is to be undertaken with reference to an open-market sale but subject to certain assumptions.

If the tenants intend to collectively enfranchise, then it is more likely than not to bring an end to the development plans and turn into an argument about development value. This will usually be a matter of valuation evidence before the First-tier Tribunal in litigation about the price to be paid by the tenants’ nominee purchaser.

During the feasibility, planning and design stage of the development, the landlord ought to take the following basic steps to ensure that there is sufficiently strong evidence that a development is possible:

1. Instruct an architect to put together detailed drawings for a planning application at the earliest opportunity;
2. Instruct a planning consultant to report on the likelihood of the development being approved. It is important that this report comments directly on the scope of the proposal and gives an expert opinion on the prospect of it being granted by the local planning authority; and
3. Seek pre-application planning advice from the planning officer on the planned development, if possible. If the advice is negative, change the proposal and re-submit for a positive decision.

In the absence of solid contemporaneous evidence about the viability of the proposed scheme, it is much easier for the qualifying tenants to argue that any prospect of development is remote and warrants only a nominal payment in compensation to the landlord, if indeed anything.

These are only some of the potential problems facing a development of rooftop flats. The key to success is early planning and realistic professional advice because roadblocks are easier and cheaper to overcome before the development starts.

Part one of this article can be read here.

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