When does a proposed flat become a flat

The Court of Appeal held that a flat, for the purposes of the Leasehold Reform Housing & Urban Development Act 1993 (the 1993 Act), had to be capable of being used as a flat. The case has wider implications and may affect the operation of the Landlord and Tenant Act 1987.

Background

To exercise the right of collective enfranchisement, at least 50% by number of the qualifying tenants of flats within the building have to participate in the claim to acquire the freehold and any intermediate leasehold interests in their building. In the Aldford House Freehold Ltd v Grosvenor (Mayfair) Estate case, the number of flats in the building was crucial to the success or failure of the tenants’ claim.

Facts

The tenants of Aldford House sought to collectively enfranchise to acquire the freehold of their building along with an intermediate lease in favour of K Group, pursuant to the 1993 Act. 13 of the tenants participated in the claim.

At the date of the claim, the building consisted of residential flats. The issue in dispute related to exactly how many flats were in the building at that time. The tenants argued that there were 26 flats, while the freeholder maintained there were 30. If the freeholder was correct, the conditions for collective enfranchisement would not have been met as 50% or more of the tenants would not be participating in the claim.

The sixth and seventh floors had previously contained one flat on each floor. K Group had demolished these and was in the process of creating four additional flats. Leases had been granted of those potential flats to separate corporate tenants. Prior to service of the tenants’ notice, K Group became aware that they may be seeking to collectively enfranchise and carried out additional work in an apparent bid to bolster its position in relation to the claim. It installed dividing walls to separate the intended flats along with installing suspended ceilings and boarding for the floors. Each dividing wall had a large door installed to facilitate access by builders. The fit-out works had not been completed.

This issue of whether the spaces on the sixth and seventh floors were flats was crucial in determining whether the initial notice was valid pursuant to the 1993 Act, which requires all of the qualifying tenants of flats within the building to be named. As K Group had granted four residential leases over the sixth and seventh floors, it argued that those tenants should have been named in the notice and, if they had been named, the number of participating tenants would not have been sufficient to satisfy the 50% rule in the 1993 Act.

To be a flat as defined within the 1993 Act, the flats would have to be a separate set of premises constructed or adapted for the purposes of a dwelling.

The questions in issue in this case were, (i) were the individual areas on the sixth and seventh floors ‘a separate set of premises’ and if so, (ii) were each of those ‘constructed or adapted for use for the purposes of a dwelling’?

Decision

The Court of Appeal allowed the appeal holding that, at the time of the claim, there were 26 flats within Aldford House.

While the Court of Appeal agreed with the High Court judge that the sixth and seventh floor spaces were ‘separate [sets] of premises’ and thus satisfied the first stage of the flat definition, it disagreed with the judge regarding whether or not the spaces were constructed or adapted for the purposes of a dwelling.

Lewison LJ said: “A separate set of premises is not a flat (as defined) unless at some stage in its history it has reached a stage of construction to be suitable for use for the purposes of a dwelling. On the judge's findings the intended flats on the sixth and seventh floors had not reached that stage. Accordingly, they were not flats. It follows that at the relevant date the building contained 26 flats rather than 30. The initial notice was therefore not required to name the lessees of what would become the remaining four flats. If, therefore, the initial notice was authorised by thirteen qualifying tenants or more, it was validly served.”

Comment

The construction works carried out by K Group were not enough to defeat the enfranchisement claim in this case. What is enough will be a matter of fact but evidence of the flats being in a habitable state is required. Accordingly, the fact that residential leases were granted was not relevant in deciding how many flats were in the building.

Importantly, the definition of a flat within the 1993 Act is the same as the definition of a flat within the Landlord and Tenant Act 1987 (1987 Act). That Act gives important rights to tenants of a building to acquire a proposed disposal from their immediate landlord (known as the right of first refusal). Developers often agree an onward disposal ahead of flats being constructed before rights of first refusal arise to avoid having to offer the tenants the disposal. This case may buy the developers more time if construction has started but those flats cannot be said to have ‘reached a stage of construction to be suitable for use for the purposes of a dwelling’.

The decision does however muddy the waters where some flats have reached the relevant stage of completion and others have not. In newbuild developments it is commonly accepted that a contract to dispose of the freehold should be in place prior to 50% of the proposed flats being sold, now however it would seem the focus shifts towards the state of those proposed flats. Once two or more units transition from shells to flats the 1987 Act provisions may be triggered, regardless of how many flats are planned and the percentage of those that have been sold off plan.

Aldford House Freehold Ltd v Grosvenor (Mayfair) Estate [2019] EWCA Civ 1848