The Right of First Refusal and ringfencing future development potential

In York House (Chelsea) Ltd v Thompson and another [2019] EWHC 2203 (Ch), the High Court held that the grant of new leases by husband and wife owners to one or other of themselves was an exempt disposal under the Landlord and Tenant Act 1987.

Facts

The freehold of York House, a block of 42 flats in Chelsea, was owned by Mr Thompson and his wife Mrs Thompson (H and W). In 2017 Mr H and W became aware that some of the lessees of York House were planning on claiming the freehold of the building under the Leasehold Reform, Housing and Urban Development Act 1993 (‘the 1993 Act’). They were concerned that the price payable under the 1993 Act would not properly reflect the development opportunities in relation to York House.

In order to preserve the development value in various parts of the premises, H and W granted 14 leases of various parts of the block, including the courtyard, subsoil, airspace and internal corridors, to one or other of themselves. No premium was payable and the rent was a peppercorn in each case. No offer notices under s.5 of the 1987 Act were served.

A majority of the lessees of the flat claimed that the leases were relevant disposals and sought to acquire the leases by serving notices under section 12B of the Landlord and Tenant Act 1987 (LTA 1987).
 

Issues in dispute

The two main issues for consideration were:

  • Whether the disposals effected by the Leases fell within one or other of the exemptions in section 4(2)(e) or 4(2)(h) of the LTA 1987, as H and W claimed.
  • If they did not constitute exempt disposals, whether each of the Leases was a disposal which affected any premises to which the LTA 1987 applied.

Decision

Mr Justice Zacaroli found in favour of H and W, dismissing Y's claim holding that the grant of the leases were not relevant disposals as they were excluded pursuant to sections 4(2)(e) and 4(2)(h) of the 1987 Act.

Section 4(2)(e) excludes a disposal by way of a gift to a member of the landlord’s family. Mr Justice Zacaroli considered this exclusion was wide enough to include the grant of a lease where the lease was granted otherwise than in exchange for anything of value (and the covenants entered into by the tenant would not prevent the lease being by way of gift). It was possible to describe a gift from a husband and wife to one of them alone as a gift to a member of the family. The motive for entering into the transaction was considered irrelevant.

Section 4(2)(h) excludes a disposal by way of a transfer by two or more members of a family to fewer of their number or to a different combination of family members (as long as at least one of the transferors remains).The court considered the word ‘transfer’ in the legislation did not limit the types of disposal and it could apply to the creation of an estate such as a lease.

Although not strictly necessary Mr Justice Zacaroli considered the issue of whether the disposal were relevant disposals affecting premises to which the LTA 1987 applied.

H and W tried to argue in this case that the right of first refusal only applied to a disposal of part of a building which is either part of the common parts of the building or a part over which two or more qualifying tenants enjoy rights in their leases.

Mr Justice Zacaroli held that the previous decision of Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] EWHC 350 (Ch) was correctly decided, and that all the leases demised parts of the building to which the Act applied, or appurtenances to the building. The disposal of any part of a building in which the tenants’ flats are located was considered a relevant disposal for the purposes of the 1987 Act, unless specifically excluded by the 1987 Act.

This could therefore include the grant of a lease of a commercial unit for market value in a mixed-use building.

Comment

It is common for landlords to seek to ringfence development opportunities for their own benefit where a collective enfranchisement claim is anticipated. This decision demonstrates that it is possible to put such a structure in place without triggering the LTA 1987 but it is important to note that any such leases could still potentially be acquired by tenants as part of a collective enfranchisement claim.

The lessees in this case were not aware on the leases at the time they brought their enfranchisement claim (as the lease had not been registered at the Land Registry at that stage). The lessees could have possibly avoided this by serving information notices under section 11 of the 1993 Act before making the collective enfranchisement claim.

The judgment can be read here (pdf, 340Kb)  

David Burns is a Partner and Head of the firm’s Enfranchisement and Lease Extension team. He can be contacted on his direct dial 0207 467 5751 or by email.

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