Landlords must think long-term to safeguard development potential

When granting long leases of flats, landlords should think carefully about what rights they should give over common areas; and, when responding to a claim by the lessees to acquire the freehold, the landlord must take great care when proposing to grant equivalent rights over common areas.

Under the Leasehold Reform, Housing and Urban Development Act 1993 the long leaseholders of a block of flats have the right to acquire the freehold of the building, together with common areas, such as gardens and car parks, from the freeholder.

Under section 1(4) of the Act, the landlord has the option to grant permanent rights over the common areas to the lessees equivalent to those they currently enjoy under their leases instead of transferring the freehold of the common areas to them.

In a recent case, Snowball Assets Limited owned a block of flats in Kensington and Chelsea and received a claim to purchase the freehold from a company formed by the lessees, Huntsmore House (Freehold) Limited. This also included a claim to acquire the common areas, including garden, parking spaces and leisure complex.

Snowball gave Hunstmore the right to purchase the freehold of the building but not the freehold of the common areas. Instead, it sought to grant equivalent rights. However, Snowball relied on provisions in the lease reserving development rights to the landlord to make the rights that it proposed to grant under section 1(4) precarious by allowing it, effectively, to revoke those rights at any time in the future. Snowball’s evidence included plans to develop the common areas, in particular replacing the leisure complex with a new block of flats.

The First-tier Tribunal  (FtT) decided that Huntsmore was entitled to purchase the freehold of the common areas for £10,000. Snowball appealed to the Upper Tribunal (UT) arguing that because the lessees only had precarious rights to the common areas under the lease, and it had offered to grant equivalent, precarious rights, the FtT was wrong. Alternatively, if Huntsmore was entitled to the freehold, it should pay £100,000 not £10,000.

The UT did not agree with Snowball’s argument. Nevertheless, it went on to confirm the interpretation of section 1(4) of the Act in a 2011 UT decision (Fluss v Queensbridge Terrace Limited). According to that decision, where a landlord wants to grant equivalent rights over common areas instead of giving up freehold title, they must grant the rights that are actually being enjoyed by the lessees at the date of the claim, even if they are subject to revocation under the lease, and they must grant those rights permanently.

The UT decided that because Snowball had failed to offer equivalent rights, Huntsmore was entitled to purchase the freehold of the common areas. It did not accept Snowball’s argument that it should extend the rights that Snowball had originally offered so that they were compliant with section 1(4). It also rejected the argument that the price payable should be more than the £10,000 determined by the FtT.