Flats: how to avoid rising tensions

There are three distinct areas that often cause disputes in relation to flats: rights
of first refusal; service charges; and, easements.

Back to basics

As part I of the Landlord and Tenant Act 1987 has often been criticised (“ill drafted, complicated
and confused” per Denetower Ltd v Toop [1991]
1 WLR 945), it is always worth going back to the very basics.

What does part I of the Landlord and Tenant Act 1987 do? The Act requires the landlord of a building containing flats and to which the Act applies to serve notice on the qualifying tenants of that building before entering into a contract to make a ‘relevant disposal’.

When does the Act apply? It applies to premises if they consist of the whole or part of a building, they contain two or more flats held by qualifying tenants and the number of such flats exceeds 50 per cent of the total number of flats contained in the premises.

What is a ‘relevant disposal’? A disposal by the landlord of any estate or interest (whether legal or equitable) in any premises to which the 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 most obvious disposal would be the sale of the freehold, but the grant of a number of lesser interests such as a lease of the common parts would also be caught. The grant of any tenancy under which the demised premises consist of a single flat is an exception and is not caught by
the Act.

Who is the landlord? The landlord is (subject
to some exceptions) the person in relation to
the premises consisting of the whole or part
of a building who is the immediate landlord of
the qualifying tenants of the flats contained in those premises.

Who is a qualifying tenant? A qualifying tenant (QT) is a tenant of a flat. The term includes sub-tenants and persons holding under an agreement for lease. It also includes a Rent Act 1977 statutory tenant but not an assured tenant (specific exclusion). But a tenant whose landlord is a QT of the flat cannot be a QT himself – there can only be one QT per flat. If a person is a tenant of three or more flats then he ceases to be the QT of any of them.

What is the effect of the notice? The notice served by the landlord must contain particulars of the principal terms of the disposal by the landlord and must state that the notice constitutes an offer by the landlord to enter into a contract on those terms, which may be accepted by the requisite majority of the qualifying tenants of the constituent flats.

Criminal offence

What if no notice is served and the landlord makes a relevant disposal? The landlord may commit a criminal offence. The tenants may seek to take the benefit of the transaction by serving on the landlord and/or the purchaser (depending on the circumstances) a section12A/12B/12C notice.

What is a ‘building’? Unfortunately the Act does not define a ‘building’, so what, on the face of it, is a simple question is not so simple to answer. There are problems with terraces and composite structures. During construction, the Act applies to a building containing ‘flats’. ‘Flat’ is defined as a separate set of premises which forms part of a building, is divided horizontally and is constructed or adapted for use as a dwelling. ‘Dwelling’ means part of a building occupied or intended to be occupied as a separate dwelling. So it is possible for the Act to be triggered during the development stage.

The Act can be avoided but is it worth it?
If you are a vendor and you are selling off the
land for development, does it really matter whether a developer buys it or the tenants to prevent the development?

Common avoidance methods include: (a) the disposal of shares in a company that holds the land; (b) a disposal to a company that has been ‘associated’ (per section 1159 of the Companies Act 2006) for two years before the disposal;
(c) granting an intermediate lease of more than seven years and then disposing of the freehold; and, (d) only disposing of a beneficial interest.

However, being too clever often causes problems. Michaels v Harley House (Marylebone) Ltd [2000] Ch 104 is a classic example: a contract for the sale of shares came into existence before the land was transferred to the associated
special purpose vehicle (SPV). The share sale agreement was intended to be conditional, but
it was held otherwise.

It was held that the contract for the share sale was unconditional on its true construction, that the vendor landlord held the shares in the SPV as fiduciary for the purchaser of the shares, and therefore that the SPV had ceased to be ‘associated’ within the meaning of the Companies Act before it took a transfer of the land. Rights of first refusal were triggered.

Consultation procedure

Phillips v Francis [2012] EWHC 3650 is a controversial case, but what does it really mean for landlords?

Even if works that are entirely unconnected aggregate to more than £250 per tenant per annum, then the landlord must follow the relevant consultation procedure in order to recover more than £250 per tenant per annum or else seek dispensation from the First-tier Tribunal.

Let’s assume that the service charge year ends on 31 December. A landlord in the first six months of the year carries out general maintenance repairs that equate to £200 per tenant. The roof leaks and requires repair which would cost £150 per tenant. Before Phillips, most landlords would consider that there was no need to consult because the roof works fell below £250 per tenant. But post Phillips, not only does the landlord need to consult, his consultation will now be defective because he should have consulted for the earlier maintenance work.

This raises a number of questions where the answers are unclear: what does a landlord do in this scenario? How can a landlord budget effectively each year? How does a landlord know that he is going to need to consult?

In the example, it seems that a landlord would be best consulting for the new work and then applying for a dispensation for all the work.

Phillips is due to be heard in the Court of Appeal on 13-15 October and hopefully some guidance or clarification will be forthcoming.

A recent case has highlighted the potential problems with building works to flats and the necessity to have the required rights to carry out the work. Yeung v Potel [2014] EWCA Civ 4681, where it was held that absent of an express right to lay new gas pipes, the neighbouring flat owner could not access his neighbour’s flat to lay new pipes. The court refused to imply a reservation to enable what was it described as a sensible or desirable right because it was not necessary.

The court also considered the definition of demise that is commonly seen in flat leases in converted buildings from the 1960s. The flats were vertically stacked in the same building and with the same footprint. The demise (which was the same for both flats) included the ceilings, but not the joists of beams to which the said ceilings are attached.

It was held that the lower flat’s demise extended to the ceiling which was originally attached to ceiling joists when the lease was granted and the area above was demised to the flat above. SJ

Carl Fain is a barrister at ?Tanfield Chambers