Leasehold dreams and nightmares

Leasehold dreams and nightmares


Flats remain a fertile source of litigation whether in relation to the right to enfranchise or the interpretation of lease covenants, advises Glenda Ferneyhough

The Upper Tribunal decision in Nemcova v Fairfield Rents Ltd [2016] UKUT 303 (LC) is a warning for flat owners of the potential risk in offering their properties as holiday lets in Airbnb or similar schemes.

The lease contained a covenant that is often found in a lease of a flat ‘not to use or permit the flat to be used other than as a private residence’. The judge had no difficulty in distinguishing the occupation of the flat for a few days with occupation by a friend or a subtenant. In the former case, the transient nature of the occupation was fatal, as the occupant would not consider that the property was his private residence. Accordingly, the judge confirmed the decision of the First-Tier Tribunal that the flat owner had breached the covenant in granting short-term lettings.

The decision will be welcome news for residents’ management companies who are having to battle with the problems that can arise from use of flats as holiday lets where guests’ regular comings and goings can be intrusive for the other regular residents.

Penthouse dreams

It is now becoming common for landlords to consider the feasibility of building a penthouse on top of an existing block of flats. The potential hope value in this respect is routinely considered when a claim for collective enfranchisement is considered as the landlord will expect compensation for the loss of the potential profit.

The recent case of Francia Properties Ltd v Aristou and others [2016] PLSCS 229 deals with a block of eight flats which had been managed by a company formed by the flat owners under the right to manage (RTM) for some years. The flat owners objected to the landlord’s plan to build a ninth flat on the roof.

The Central London County Court determined that the landlord retained the power to redevelop despite the fact that the day-to-day management of the structure of the building rested with the RTM company. However, leave was given to appeal to the Court of Appeal. It will be interesting to learn the outcome. The case didn’t consider the terms of the individual leases so even if the Court of Appeal overturns the decision it won’t necessarily be plain sailing for the landlord to bring its plans to fruition.

Trustee overreach

Mortgage Express v Lambert [2016] EWCA Civ 555 considered issues that arose as a result of a sale by a flat owner in financial difficulty to two investors. The arrangement was that she would stay in occupation as tenant but this was not properly documented and the seller failed to disclose in replies to preliminary enquiries that she intended to continue to live there.

Any conveyancer for a seller would surely enquire where the seller was intending to live on completion of the sale so it does seem strange that the transaction proceeded at all. However, subsequently, the property was mortgaged and the lender later exercised its power of sale due to mortgage arrears. The occupant then disclosed the circumstances. So, should the sale be set aside as an unconscionable bargain?

The judgment in the lower court was set aside by the Court of Appeal after it considered the later mortgage of the property by two trustees overreached the occupant’s potential right to have the transaction set aside. Reference was made to section 2(1)(ii) of the Law of Property Act 1925, which was stated as applying to all equitable interests and not just those arising under trusts. As a result, Mortgage Express did have an effective charge over the property. This case is instructive to conveyancers as to the potential risks to all parties involved in failing to properly document sale and leaseback arrangements.

Lease extensions

A residential lease extension pursuant to the Leasehold Reform, Housing and Development Act 1993 is now routine, but there are traps for the unwary. The High Court decision of Greenpine Investment Holding Ltd v Howard de Walden Estates Ltd and another [2016] EWHC 1923 (Ch) considered when the terms of acquisition are deemed to be agreed in the course of a claim. This date is significant because of the strict time limit that then applies to regulate when the lease extension must be completed.

In this case the lessee was a company registered in the British Virgin Islands and the landlord stated in its counter notice that it required sight of an opinion from a BVI lawyer that the lessee had the necessary status as a registered BVI company. The lessee made an application to the First Tier Tribunal to settle the terms of acquisition and the form of lease was agreed and the opinion received. At that point the landlord queried whether the application to the tribunal had been made in good time. If it hadn’t been made in time then the claim had already fallen.

In this case the court decided that the claim had failed and the lessee was unable to complete the lease extension. Under the 1993 Act a lessee is barred from commencing another claim for a year so the cost of the lease extension will be considerably more than would have been the case at the initial valuation date. The case acts as a reminder to keep these time limits under review.

Bank references

Is it reasonable for a landlord to require a bank reference before granting consent to assign a residential lease? The judge considered it was a fair requirement, in principle, when considering the facts in No. 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2016] EWHC 2438 (Ch).

The case arose from a claim for a declaration by the lessee of three underleases of residential apartments that the landlord had unreasonably refused consent to assignment. The judge stated that the landlord was entitled to satisfy itself as to ability to pay the service charge, as the purchase price for the flats might have been provided as a gift rather than from the buyer’s own resources. However, the actions of the landlord were not considered overall to have been reasonable on the facts of this case.

Building schemes

In an earlier article this year (SJ160/33) I drew attention to the difficulties of creating a building scheme in view of the decision in Birdlip Ltd v Hunter and another [2016] EWCA Civ 603. In San Juan v Allen [2016] EWHC 1502 (Ch) the judge found on the facts that a building scheme had been created, even though the phrase was not used in the documentation. Each transfer on the developer’s estate of houses was in the same form with identical covenants.

Additionally, and crucially, each transfer plan showed the layout of the entire estate. In the absence of a scheme the complainant would have been unable to enforce the particular covenant affecting a second property because his property had been sold off at an earlier time. Clearly the moral for a conveyancer drafting estate documentation is to state whether or not there is an intention to create a building scheme.

Glenda Ferneyhough is a partner at SA Law