Trustees of the Alice Ellen Cooper-Dean Charitable Foundation v Greensleeves Owners Limited [2015]

Freeholder compensation during two-stage enfranchisement

Freeholder not entitled to compensation in two-stage enfranchisement

Each of eight residential flats at a property reserved a ground rent of £300 per annum. A rent review was scheduled for late 2015. A headlease, granted to a third party management company, reserved a ground rent of £2,400 payable to the freeholder and this was also subject to a review in late 2015.

Six tenants were granted lease extensions under the Leasehold Reform, Housing and Urban Development Act 1993 (“LRHUDA 1993”) which resulted in a reduction of the ground rent payable to the management company from £300 to a peppercorn. In consideration of its rent obligations under the headlease, compensation of £19,495 per flat was awarded to the management company and, in reflection of the value of the reversion, the freeholder was awarded £2,612 per flat.

Following the lease extensions, the headlease had a negative value and was considered an onerous asset; the management company had a liability of £2,400 per annum with income of only £600 plus six peppercorn rents. The value of the headlease was valued at minus £201,900.

Further, the six tenants then brought a claim for collective enfranchisement under which the nominated purchaser acquired the freehold of the building and the headlease. The freeholder’s interest was valued at £166,770.

The freeholder brought an appeal in the Upper Tribunal, which was asked to consider whether the negative value of the headlease could be deducted from the value of the freeholder’s interest in the property. If so, was compensation payable to the freeholder for financial losses incurred as a result of the acquisition of the freehold by the nominated purchaser?

The Law

The freeholder put forward a number of arguments to support its claim that it should receive financial compensation:

• It argued that the tenants had incorrectly interpreted LRHUDA 1993;
• It considered that, if the tenants’ interpretation of LRHUDA 1993 was correct, then this was an infringement of the Human Rights Act 1998 as the freeholder should not be deprived of property without compensation; and
• It claimed that under LRHUDA 1993 Schedule 6 para 5, compensation was owed to the freeholder in an amount equivalent to its lost value in the freehold interest of £166,770.

LRHUDA 1993 Schedule 6 para 5 states that:

“Where the freeholder will suffer any loss or damage to which this paragraph applies, there shall be payable to him such amount as is reasonable to compensate him for that loss or damage.”

The tenants’ argument centred on LRHUDA 1993 Schedule 14 para 6, stating:

“Where a sub-lease terminating with the new lease in accordance with paragraph 3 is one to which Part II of the Landlord and Tenant Act 1954 applies, the compensation payable to the tenant shall be pided between him and the sub-tenant in such proportions as may be just, regard being had to their respective interests in the flat in question and to any loss arising from the termination of those interests and not incurred by imprudence.”

The Decision

The tenants, in determining the amount payable by the nominated purchaser on enfranchisement, referenced LRHUDA 1993 and argued that the sums of £166,770 and minus £201,990 should be netted off against each other. This resulted in no monies being payable to the freeholder; the LVT agreed and the UT upheld this decision.

In judgement, the UT held:

• that the wording of LRHUDA 1993 Schedule 14 para 6 was clear, requiring the respective values to be netted against each other as argued by the tenants. The UT noted that the scenario could have been avoided by the freeholder making an application for compensation under LRHUDA 1993 Sch 13 para 5 as part of the lease extension claim;
• that the Human Rights Act part of the claim should be dismissed, referencing Nailrile Ltd v Earl Cadogan [2009] where the same decision was reached. Compensation was available to the freeholder during part of the process and, under LRHUDA 1993, there is equally the possibility that the freeholder may receive compensation for a loss which never materialises;
• that compensation was not available to the freeholder, and that it should have applied for compensation as part of the earlier lease extension claim.

JB Leitch’s Rob Denman comments:

“Two-stage enfranchisements present a problem for freeholders where lease extension claims may result in a negative value against head and intermediate leases. Freeholders need to be alive to the fact that, in order to increase chances of recovering compensation, their claim must be made during the earlier lease extension phase, regardless of whether or not they anticipate a future enfranchisement claim being made.”