It is not uncommon for the owner of the freehold of a block of flats to try to capitalise on the future development potential of a building, by granting leases over currently unoccupied or underutilised areas which could be used to create additional units. This is particularly so in cities like London, where space is limited and there is huge demand for roof top, basement and sub-basement development sites which can be acquired through leases over airspace, subsoil or below ground storage areas.
However, while it makes sense for freeholders to try to maximise the value that can be derived from the buildings they own, care must be taken when negotiating development leases in order to ensure that you can put your plans into action.
And as our leasehold enfranchisement experts Daniel Ginsbury and Adam Pearlman explain:
‘This is especially important where there is a risk that you could be susceptible to an application for collective enfranchisement from your existing tenants if they seek to exercise their statutory rights to acquire the freehold to your building. This is because of a recent ruling from the Court of Appeal in the case of LM Homes Ltd and others v Queen Court Freehold Company Ltd (2020), which paves the way for airspace, subsoil and basement areas to be encompassed within an enfranchisement claim and therefore taken outside of your control if an application succeed.’
Indeed, as Daniel notes ‘As a result of the decision in this case, there is now increased scope for tenants to use the enfranchisement process to acquire ownership rights in respect of airspace, subsoil and basements areas. In doing so they may be able to prevent planned developments from going ahead and thus limit your ability to maximise the return on your investment.’
While it makes sense for freeholders to try to maximise the value that can be derived from the buildings they own, care must be taken when negotiating development leases in order to ensure that you can put your plans into action.
Background to LM Homes Ltd v Queen Court Freehold Company Ltd
Queen Court is a block of 45 flats located on Queen Square in Bloomsbury, London. The tenants of the flats elected to exercise their right to acquire the freehold to the building, as they are permitted to do under the collective enfranchisement process set out in the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act).
A dispute arose when the tenants claimed, as part of their application, that as well as being entitled to acquire the freehold of the building, they were also entitled to acquire the subsoil on which the building stood, the airspace above it and the entirety of the basement area.
This was disputed by the landlord, on the basis that all of these areas were said to be outside of what could be defined as either the building itself or any common parts. In addition, they were also subject to the following separate development leases:
- a lease of the roof and seven meters of airspace above it, granted to LM Homes;
- a lease of part of the building’s basement, granted to Mr and Mrs Emore; and
- a lease of the subsoil on which the building sat, granted to Mrs Kaur.
Relevant statutory provisions
The 1993 Act entitled the tenants to acquire the freehold of the building in which their flats were housed. In addition, they were entitled to acquire any other property covered by their leases, or which they were entitled to use by virtue of them being ‘common parts’ – which included the structure and exterior of the building, or part of the building, together with any common facilities.
They were also entitled to acquire certain leasehold interests which had been granted over any common areas, provided they could show that the acquisition of such interests was reasonably necessary for the proper management or maintenance of those parts on behalf of the tenants going forward.
The tenants argued that the airspace, subsoil and basement area were each caught by some or all of these provisions, and accordingly that they had a statutory right to acquire them.
The holders of the leases covering these areas disagreed, claiming that they did not fall within the definition of either the building itself or the common parts and accordingly could not be acquired ‘as of right’ by the tenants under the collective enfranchisement process.
Decision of the court
Siding with the tenants, the court demonstrated a willingness to apply a generous interpretation to the meaning of ‘building’ and ‘common parts’ and in so doing declared that when considering a collective enfranchisement claim the ordinary rules around the conveyance of property must be applied, which require consideration of what anyone looking to buy a freehold interest would expect to be included within their purchase.
A buyer of the freehold to a block of flats would expect to see included:
- the building itself, with the basement forming part and parcel of that; and
- the airspace above and the subsoil below, in order to ensure that they had rights of access to repair and maintain the roof and the building’s foundations.
Whether any of the areas covered by the development leases could be said to be ‘common parts’, was to be determined by reference to how those areas were being used when the tenants served their notice of enfranchisement. At the relevant time, there was an area of the basement that was being used to accommodate service installations, which benefited the whole of the building, and which could therefore be classed as a common part. The airspace and subsoil were also common parts at the relevant time, either because they formed part of the building itself or because they were part of the exterior of the building.
It did not matter that title to the basement, airspace and subsoil were owned under separate leases when the notice was served, because the grant of a lease by itself did not turn common parts into non-common parts. However, it should be noted that the court did say that the position would have been different had the areas already been altered when the notice was served. In that scenario, the alterations could have prevented those areas being used as common parts.
The leases of the airspace, basement and subsoil were all subject to reservation provisions which entitled these areas to continue to be accessed for emergency purposes and to facilitate the performance of the lessor’s obligations to the owners and occupiers of the current flats. However, this was not sufficient to address the fact that if the proposed developments were allowed to go ahead, these common areas would effectively be lost. This meant that it was reasonably necessary for the tenants to be allowed to acquire them, in order to preserve the status quo and allow for their ongoing management and maintenance.
Conclusion
The decision in this case provides a welcome boost for tenants who are looking to make a collective enfranchisement claim, and who are keen to keep control of key areas in order to ensure that the building they live in can continue to be effectively managed and maintained.
The decision also demonstrates the ease with which previously agreed development plans can be disrupted when an enfranchisement claim is made and highlights the importance of freeholders and lessors considering this in advance of any development leases being agreed, and particularly when it comes to settling on the price that the would-be developer will be asked to pay.
Daniel Ginsbury
How we can help
Our property lawyers have extensive experience in negotiating development leases and in dealing with any enfranchisement claims that may emerge, so please feel free to contact us for further advice. You can speak to Daniel Ginsbury or Adam Pearlman on 020 7845 7400 or contact them via email at danielginsbury@iwg.co.uk or adampearlman@iwg.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.