Christopher Sykes examines the latest issues to arise out of leasehold enfranchisement and the right to manage


Valuation

In order to calculate the price to be paid to a landlord under the relevant enfranchisement legislation, whether by a tenant exercising an individual right or by a group of tenants acting collectively, complex formulae are used.



As part of that process, it is necessary to determine the future value of the freehold once the lease or leases have expired and then give a discount for the accelerated receipt. This is done by applying an interest rate to the present freehold value, known as the 'deferment rate'. In simple terms, the higher the deferment rate, the lower the price the tenants will have to pay, and vice versa. While this may seem somewhat obscure and academic, the level of deferment rate can, and is, having a significant effect on price. It is one of the most hotly debated topics in the world of leasehold enfranchisement.



The key decision derives from a series of cases, the lead one of which being Earl Cadogan and Cadogan Estates Limited v Sportelli [2006] EWLands LRA 50 2005, collectively referred to as Sportelli and decided in the Lands Tribunal on 15 September 2006.



After hearing detailed financial and valuation evidence, the Lands Tribunal held that, as a general guidance, the appropriate deferment rate is 5% for flats and 4.75% for houses. The higher rate for flats reflects the greater management problems associated with them. This deferment rate should be adopted by the Leasehold Valuation Tribunal (LVT) for all reversions in excess of 20 years unless the tribunal is satisfied that there are particular features that fall outside the matters that are reflected in the vacant possession value of a house or flat or in the deferment rate itself, and that can be shown to make a departure from the rate appropriate. The Lands Tribunal found no justification for varying the deferment rate in respect of length of term, location or condition and also held that hope value is excluded.



From cases that followed Sportelli, it first appeared that parties and tribunals had accepted that the deferment rate was, in effect, now fixed. However, after loud opposition voiced by valuers and surveyors, some tribunals have recently rejected the 'one rate fits all' approach and allowed for a higher rate to be used benefiting the tenants. The Court of Appeal should shortly decide whether to back this more flexible approach in an appeal on the level of the deferment rate and on whether or not hope value should be taken into account.



Lease extension

With potentially large sums of money at stake, when tenants seek to exercise their statutory rights there is an ongoing battle between landlords and tenants, with the latter seeking to extend the scope of the rights and to decrease the price payable and the former seeking the opposite.



Another recent example where the landlord came out on top was in Howard de Walden Estates Limited v Les Aggio and Earl Cadogan and Cadogan Estates Limited v 26 Cadogan Square Limited [2007] EWCA Civ 499 (see [2007] Gazette, 7 June, 29). In these conjoined cases, the head lessees were seeking to exercise the right under the Leasehold Reform Housing and Urban Development Act 1993 given to a qualifying tenant of a flat to be granted a new lease for a term equal to the unexpired residue of the existing lease plus 90 years. The head lease in each case comprised of flats together with communal and other parts. The Court of Appeal held that a head lessee was not the qualifying tenant for the purpose of the Act in respect of each flat comprised in the head lease.



While at first sight it might appear strange that a head lessee should have an arguable case, the possibility for such argument was created by changes made to the 1993 Act by the Commonhold and Leasehold Reform Act 2002. Prior to July 2002, one qualifying condition was that a tenant had to show they had occupied the flat as their only or principal home for the past three years or three years in the last ten. The 2002 Act removed this condition.



In Maurice v Hollow-Ware Products [2005] 2 EGLR 71, it was held in the High Court that the head lessee of a block of flats did constitute a qualifying tenant for the relevant purposes, even though there were some practical legal difficulties caused by the fact that the head lease would have to be separated into several different parts and might require parties to create a new scheme of covenants from the use of the common parts. As a consequence of that earlier decision, until the challenge to this principle in Howard de Walden, which has now overruled it, a number of head lessees were able to exercise the right of individual lease extension but with the parties adopting a pragmatic approach to resolving some of the consequential issues relating to the legal structure of the building concerned.



What is interesting about this issue is that a head lessee ought, on the face of it, to be able to fulfil the relevant qualifying criteria and the 1993 Act contemplates that the lease might be of premises other than the flat itself. The primary reason that the Court of Appeal found against the head lessees in Howard de Walden was that it considered that Parliament did not intend to give the right of individual lease extension to a head lessee. There were no statutory references to head lessees in the relevant part of the Act and it contained no machinery for dealing with the consequences.



While disappointing for those acting for tenants looking for imaginative ways to improve the value of their interests, the issue is possibly not quite dead yet. The respondents are seeking leave to appeal to the House of Lords.



The right to manage

The 2002 Act introduced the right of tenants of blocks of flats to collectively exercise a right to take over the management of their building through a right-to-manage (RTM) company. Despite some inadequacies in the legislation, it has generally proved surprisingly easy for tenants to exercise this right. There is no price to be argued over or paid, and there is no scope for the landlord to object to exercise of the right on merit, for example by questioning the suitability or otherwise of the RTM company to manage.



Many landlords have adopted a pragmatic approach and tried to protect their interests by agreement with the RTM company, accepting that there is not a lot that they can do about the claim itself. There have been comparatively few decided cases. Where cases have come before the LVT, it has tended to give short shrift to landlords' arguments based on what may be described as minor technicalities, but claims have been rejected if there has been some major non-compliance with procedural formalities, for example where an RTM company does not use the prescribed forms for notices.



Lying behind some of the more straightforward aspects of the right are complex practical and legal issues. One area the 2002 Act does not address properly is where there is an estate of more than one block or where a block shares communal facilities. One qualifying criteria is that the premises must be a self-contained building or part of a building. In Minshull Place RTM Company Ltd v Park Rutland Limited (LVT-Lon/00AF/LRM/2004/0045), an RTM company sought to exercise the right to manage in respect of two adjoining blocks of flats which it asserted were one building for the purposes of the 2002 Act. The landlord alleged that the subject property was, in fact, two separate blocks.



In finding that the blocks were one self-contained building, therefore that the RTM company was entitled to exercise the right to manage the whole, the tribunal looked at a number of factors, including the extent to which the two blocks were connected, the fact that the roof was continuous across the entire building, that historically for planning and other purposes the property had been developed and dealt with as a single entity, and that the alleged party wall between the supposed separate blocks was no more than an architectural feature.



A more recent case looking at the issue of qualifying premises, Oakwood Court (Holland Park) Limited v Daejan Properties Limited (Central London Civil Justice Centre, Judge Hazel Marshal QC, 2007 unreported), while under the collective enfranchisement legislation, is also relevant in connection with the exercise of RTM claims. Here the participating tenants sought to enfranchise a block of flats which shared services with another block on the same estate, namely the hot water supply from a boiler contained in a separate boiler house in the grounds. The tenants claimed that their block was a self-contained part of a building.



A part is self-contained if relevant services are provided independently from services provided for the remainder, or could be so provided without involving significant interruption in the provision of services to the occupiers of the remainder. There is a similar qualifying criterion under the 2002 Act for a right to manage. The building was held not to be self-contained because the hot water supply could not be provided independently without causing a significant interruption in the provision of such service for the occupiers of the remainder of the building.



While these decisions are not binding, they do serve as a reminder of some of the issues that can arise in determining whether or not a property qualifies for the purposes of enfranchisement and RTM legislation, and the need to examine carefully the extent and manner in which a building is connected to any adjoining property and the way in which services are provided.



Commonhold and Leasehold Reform Act 2002

The 2002 Act introduced the right to manage and simplified the qualifying criteria for exercising the rights of long leaseholders. It also sought to improve tenants' rights in respect of and relating to the management of blocks of flats, for example by considerably beefing up the consultation requirements for the carrying out of major works.



Some elements of these reforms are still to be implemented, such as the obligation of the landlord to hold service charge money in a designated trust account or the requirement that any service charge demand must be accompanied by a summary of rights and obligations of tenants in relation to service charges.



For collective enfranchisement, one part of the statute not implemented after many years is the concept of a right to enfranchise (RTE) company. The Act envisages that collective enfranchisement rights would be exercised through an RTE company having a prescribed constitution with the requirement that all qualifying tenants be invited to participate. While one can see the good intention, regrettably its inflexible structure is simply not workable in a practical context for many collective enfranchisement operations where, for example, there may be unequal contributions or where additional value is created which may be extracted.



The following extract is from a communication from the leasehold and park home branch of the Department of Communities and Land Government, dated 12 July 2007: 'A number of legal and practical difficulties have been identified with the operation of these provisions. The principal difficulty has been in trying to prescribe an effective and fair mechanism to use where there is no agreement between participating members on enfranchisement and how their contribution to the overall purchase price should be determined.'



It is now doubted whether the RTE company provisions will ever be brought into effect and enquiry of the department reveals no current plans for implementation in the foreseeable future.



The LVT

The LVT deals with lawyers, surveyors and parties acting in person. Generally, the tribunal offices adopt a friendly and helpful approach. In the past, tribunals have perhaps been a little too willing to indulge parties, for example in granting postponements of cases listed for hearing, often at short notice and often several times in respect of one application simply on the receipt of written consent of both parties.



More recently, tribunals have been seeking to tighten up their procedure with a view to forcing the parties to comply with directions when compliance has often been seen as optional. In January 2007, the London LVT panel issued guidance notes on its procedure for cases in connection with its power to postpone hearings. The London panel stated that parties applied for a postponement in well over half of all listed hearings where the terms of acquisition had not been agreed and the cost in terms of their resources have been wholly disproportionate.



The guidance states that the tribunal will now only be likely to consider it reasonable to grant a postponement of a hearing in exceptional circumstances. There is, however, the opportunity, by consent, to defer the issue of directions (and hence the allocation of a hearing date) by three months, thus giving the parties additional time to negotiate. It remains to be seen how far the new guidelines will be observed in practice.



Christopher Sykes is the senior partner of London firm Sykes Anderson and author of Leasehold Enfranchisement and the Right to Manage: A Practical Guide published by Law Society Publishing. It can be ordered from Prolog, tel: 0870 850 1422