Leasehold Enfranchisement Update
Validity of scheme to avoid s. 5 (5) LRHUDA 1993
Case name and reference
Westbrook Dolphin Square Ltd v Friends Life Ltd  EWHC 2433
Summary – about 2 sentences
A scheme demising two leases each to hundreds of SPVs, in order to avoid the rule that a tenant holding three or more leases could not be a qualifying tenant, was effective.
Dolphin Square was at one time the largest block of flats under one roof in the world. The headlease and underlease were acquired by the American Westbrook group of companies in 2006 and shortly afterwards it granted sub-underleases of 1,223 of the 1,229 flats in Dolphin Square to 612 companies.
As set out by Mann J:
“(1) Do the SPVs each have qualifying tenancies, or are they precluded from having them by virtue of their being “associated companies” for the purposes of the statute.
(2) In the light of the creation of the scheme put in place by Westbrook in this case (that is to say creating the corporate structure and leasehold structure identified above) in order to provide an opportunity for enfranchisement which would otherwise not exist, is Westbrook prevented from enfranchising because it was not the intention of Parliament to allow such schemes (because they would circumvent what is said to be the apparent intention of the statute)? This is a version of the point which the counter-notice described as a “sham” point.
(3) Would allowing enfranchisement in the above circumstances infringe Friends Life’s rights under the Human Rights Act? This issue is related to the second.
(4) Is Friends Life entitled to argue the point that the building contains more than 25% of space occupied for non-residential purposes, in the light of the fact that it did not take that point in its counter-notice?
(5) If it is allowed to take that point, does the building in fact contain more than 25% of such space? If it does, enfranchisement is not permissible.
(6) If enfranchisement is not prevented by the above, is the tenants’ notice ineffective because it does not “specify the proposed purchase price” within the meaning of the Act. This raises the following sub-issues:
(i) Is there an objective test for validity based on an objectively justifiable price in valuation terms?
(ii) Is there a subjective test for validity based on the views of the tenant as to its justifiability in valuation terms?
(iii) If the answer to either of the above questions is Yes, does the section 13 notice in this case pass the test?
(7) If the enfranchisement scheme would otherwise operate against Friends Life, can it claim to be the “victim” of a transfer at an undervalue for the purposes of section 423 of the Insolvency Act 1986, and thereby avoid its consequences. This involves two sub-issues:
(i) Was the grant of the SPV leases a transaction at an
(ii) Even if it was, can Friends Life benefit from the section?”
(1) Under s.5(5), a person who holds more than two leases could not be a qualifying tenant. This was why the 612 SPVs were created. But the Act also provides that "associated companies" which together hold more than two leases are to be treated as one entity.
The definition of “associated companies” is to be found in s. 1159 and Schedule 6 of the Companies Act 2006 and includes subsidiary companies. Whether a company was a subsidiary depended on how it was controlled but the test “depended on legal rights of control, and not on underlying facts about the relationship”. In this case the SPVs were not subsidiary companies in this technical sense.
(2) The judge held that “Westbrook group as a whole set up the present structure with a view to being able to enfranchise, and that it was done with an eye to sections 5(5) and 5(6) so that the SPVs were not controlled by any one body. It is a somewhat elaborate and carefully crafted scheme. There is no particular commercial purpose behind this particular scheme; it is done for enfranchisement purposes.” The question was whether such a scheme fell foul of the Act. That was a matter of statutory interpretation. The judge commented:
“At the heart of Mr Jourdan’s submissions is his case that if Parliament had appreciated that this sort of thing could happen it would have legislated to prevent it. That may or may not be so, but that is not determinative of much.”
He held that s.5(5) and s.5(6) were narrow and specific provisions. The fact that Parliament had not legislated to avoid other obvious avoidance devices (such as trusts) was indicative and there were no provisions suggestive of a wider anti-avoidance purpose.
(3) The freeholder was entitled to take the point about whether more than 25 per cent of the building's floor area was occupied for non-residential purposes, notwithstanding that it was not taken in the counter-notice - 9 Cornwall Crescent London Ltd v Kensington and Chelsea RLBC  EWCA Civ 324,  1 W.L.R. 1186 applied, Bishopsgate Foundation v Curtis  3 E.G.L.R. 57 doubted.
(4) The Act did not define either "non-residential" or "residential" purposes. Mann J did not formulate a test but held that it was possible for premises to be used for residential purposes without being anyone’s home. The term "residence" indicated living, as opposed to office, accommodation, and could encompass lodgings, Owen v Elliott (Inspector of Taxes)  Ch. 786 and Urdd Gobaith Cymru v Customs and Excise Commissioners  V. & D.R. 273 applied. The definition of "common parts" assumed an ordinary meaning of those words. It was not necessary that the parts should be devoted to purposes as a matter of obligation in the leases; residents did not have to have access to them; and parts used by commercial occupants could be common parts Panagopoulos v Cadogan  Ch 177 applied. Applying those principles, less than 25 per cent of the complex was used for non-residential purposes.
(6) The requirement that the s.13 notice should specify the proposed purchase price meant that it had to contain a genuine opening offer, not a nominal figure. A genuine opening offer did not have to fall within the range of reasonably justifiable valuations, and the tenant did not have to believe that it would be accepted. However, it had to be bona fide in the sense that a reasonable landlord would see it as a real offer,Viscount Chelsea v Morris (1999) 31 H.L.R. 732, 9 Cornwall Crescent , and Howard de Walden Estates Ltd v Aggio  UKHL 44,  1 A.C. 39 applied. W's offer was bona fide.
(7) The freeholder could not claim to be the “victim” of a transfer at an undervalue for the purposes of section 423 of the Insolvency Act 1986 because, even assuming that the subunderleases to the SPVs were transactions at an undervalue there was no nexus between the transaction being at an undervalue and the harm alleged. The harm alleged would have occurred even those transactions had been at an over value.