UK: A Corporate Tenant Claims the Benefit of Enfranchisement Legislation

A recent High Court case¹ has determined that a corporate tenant holding a long lease of a building can be a "qualifying tenant" under the Leasehold Reform, Housing and Urban Development Act 1993 ("the 1993 Act"), and able to exercise the right to acquire new leases of the individual flats within the building.

The Claimants were the trustees of a charitable foundation and owned the freehold of a block of flats. The Defendant had an unexpired long lease of the entire building, containing 28 flats. The flats were let under short term occupational leases and the occupiers did not satisfy the criteria to be qualifying tenants under the 1993 Act.

The Defendant served notices pursuant to Section 42 of the 1993 Act claiming the right to acquire new leases of the flats. The new leases would be subject to the occupational interests and would run for 90 years beyond the expiry of the long lease.

The Claimants disputed the Defendant’s entitlement to new leases on the basis that the Defendant was not a "qualifying tenant" as defined by the 1993 Act. Further, the Claimants argued that the entire building was held under one lease which included the common parts and the structure. Following the grant of the new leases there would be 28 separate leases of distinct flats. However, the long lease could not be entirely extinguished by a surrender of the lease and replaced by the new leases, as the common parts and structure would continue to be governed by it. The long lease could not, therefore, be entirely substituted by the new leases, as required by the 1993 Act. The Claimant argued that if the long lease could continue to exist in this way, it would require modification and the 1993 Act contains no mechanism to modify any lease which continues to exist in part. This would create a discrepancy between the long lease and the new leases.

The Defendant argued that no specific modification was required as the necessary apportionment would be covered by common law principles which govern situations where a tenant surrenders part of a demise back to a landlord or a landlord forfeits a lease of part of land.

One of the Claimant’s concerns was that if the new leases were granted, the Defendant could assign them, leaving a shell company as lessee of the common parts, which would have no incentive to maintain them. However, the Defendant had offered, in the draft lease attached to the notices requiring the new leases, to incorporate a service charge provision in return for an obligation on the Claimant to maintain the property. The Claimant argued that this would not assist while the long lease continued to exist as, during that period, the Claimant would have no access to the common parts enabling it to maintain. The Defendant contended that if the common parts were not looked after properly, the Claimant would simply exercise its right of forfeiture as a result of the tenant being in breach of the maintenance covenant in the long lease.

• The Defendant satisfied the criteria of the 1993 Act and did hold the premises under a qualifying long lease;
• the Defendant was the tenant of more than one flat by virtue of the long lease;
• the new leases could be granted in substitution for the long lease to the extent of the premises demised by the new leases. Complete substitution of the long lease was not required;
• existing common law principles would apply as far as the reduction of rent for apportionment was concerned.

The Court agreed with the Defendant that common law principles would adequately deal with the reduction of the rent passing under the long lease, which would continue to exist in respect of the structure and common parts for the residue of its term. The Court avoided giving a detailed assessment of the service charge and maintenance obligations of the parties. Instead, it took a practical approach considering that, in the circumstances, the parties would arrive at terms in the new leases which would cover these matters. If they did not, the Court felt that the Leasehold Valuation Tribunal would have sufficient powers, under the 1993 Act, to ensure that the new leases contained appropriate terms concerning maintenance and service charges.

The Court agreed with the Defendant that whilst the long lease remained in existence in respect of the common parts and structure, the Claimant would have the remedy of forfeiture in the event that the tenant of the long lease failed to perform its repairing covenant.

The right to require new long leases under the 1993 Act could be of benefit to tenants who may not qualify for the right to collective enfranchisement. The Defendant was able to acquire new leases of the flats within the building at a peppercorn rent, for a term of 90 years following the expiry of the existing long lease, without having to take on responsibility for the maintenance of the building once the long lease had expired.

The aim of the 1993 Act was originally to benefit occupiers of residential flats held under long leases. However, it can allow corporate tenants to acquire commercially valuable leases at the cost of a landlord losing its right to the reversion when a long lease expires.

^{1 Maurice –v- Hollow-Ware Products Limited}

© RadcliffesLeBrasseur

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