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ENFRANCHISEMENT

- Avoiding Costly Mistakes

by

Piers Harrison Tanfield Chambers

for the Property Litigation Association Annual Conference Keble College, Oxford – Friday, 27 March 2015

Piers' practice covers all areas of property law. He has a particular interest in leasehold

enfranchisement. He is the co-author of “Megarry’s Manual of the Law of Real Property”

(Sweet & Maxwell 9th edition) and “Leasehold Enfranchisement Law and Practice”

(Wildy’s 1st edition). He sits on the editorial board of Landlord and Tenant Review. He

recently appeared in Natt v Osman [2014] EWCA Civ 1520 the leading case on the

validity of notices in this field.

TANFIELD CHAMBERS 2 - 5 Warwick Court London WC1R 5DJ Tel: 020 7421 5300 Fax: 020 7421 5333 Email: piersharrison@tanfieldchambers.co.uk

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Introduction

1. In this seminar we will look at the provisions of the 1993 Act in relation to notices

and then look at a problem question. Although we will not look at the statutory

provisions of the 1967 Act I will identify parallels.

Meeting the Eligibility Criteria

Collective Enfranchisement

Qualifying tenant

2. A qualifying tenant is a Tenant of a flat under a long lease (s.5). For most

purposes that means a term certain exceeding 21 years (s.7). For collective

enfranchisement purposes (but not individual lease extension claims) a tenant

ceases to be a qualifying tenant if he is the tenant of 3 or more flats (s. 5 (5).

That rule is easily circumvented by use of nominees.

Qualifying premises

3. Under section 3(1) three conditions must be satisfied for premises to qualify for

collective enfranchisement. These are:

(1) the premises must consist of a self-contained building or part of a

building;

(2) the premises must contain two or more flats held by qualifying tenants;

(3) the total number of flats held by such tenants must not be less than

two-thirds of the total number of flats contained in the premises.

4. S. 4 provides:

“(1) This Chapter does not apply to premises falling within section 3(1) if

(a) any part or parts of the premises is or are neither-

(i) occupied or intended to be occupied for residential purposes, nor

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(ii) comprised in any common parts of the premises; and

(b) the internal floor area of that part or those parts (taken together)

exceeds 25 per cent of the internal floor area of the premises (taken as a

whole).”

Individual lease extension

Qualifying tenant

5. A qualifying tenant is a tenant of a flat held on a long lease (s. 39 (3)). But there

is an additional requirement that he has been a qualifying tenant for two years (s.

39 (2)). The “three flats rule” (s. 5 (5) does not apply.

Getting the notice right

Distinguishing between mandatory statutory requirements and eligibility criteria

6. In Sinclair Gardens Investments (Kensington) Ltd v Poets Chase Freehold Co.

Ltd [2007] EWHC 1776 Morgan J drew a distinction between a notice which is

void for failure to comply with the statutory requirements and a notice which is

potentially valid, but which will ultimately fail because the eligibility criteria are not

met.

7. The statutory requirements are set out in s. 13 (3) (for collective

enfranchisement) and s. 42 (3) (for individual lease extensions). They are very

similar. S. 13 (3) is set out below.

“(3) The initial notice must—

(a) specify and be accompanied by a plan showing—

(i) the premises of which the freehold is proposed to be acquired by virtue

of section 1(1),

(ii) any property of which the freehold is proposed to be acquired by virtue

of section 1(2)(a), and

(iii) any property over which it is proposed that rights (specified in the

notice) should be granted in connection with the acquisition of the freehold

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of the specified premises or of any such property so far as falling within

section 1(3)(a);

(b) contain a statement of the grounds on which it is claimed that the

specified premises are, on the relevant date, premises to which this

Chapter applies;

(c) specify—

(i) any leasehold interest proposed to be acquired under or by virtue of

section 2(1)(a) or (b), and

(ii) any flats or other units contained in the specified premises in relation to

which it is considered that any of the requirements in Part II of Schedule 9

to this Act are applicable;

(d) specify the proposed purchase price for each of the following,

namely—

(i) the freehold interest in the specified premises [, or if the freehold of the

whole of the specified premises is not owned by the same person, each of

the freehold interests in those premises ,

(ii) the freehold interest in any property specified under paragraph (a)(ii),

and

(iii) any leasehold interest specified under paragraph (c)(i);

(e) state the full names of all the qualifying tenants of flats contained in the

specified premises and the addresses of their flats, and contain in relation

to each of those tenants, —

(i) such particulars of his lease as are sufficient to identify it, including the

date on which the lease was entered into, the term for which it was

granted and the date of the commencement of the term,

(f) state the full name or names of the person or persons appointed as the

nominee purchaser for the purposes of section 15, and an address in

England and Wales at which notices may be given to that person or those

persons under this Chapter; and

(g) specify the date by which the reversioner must respond to the notice

by giving a counter-notice under section 21.”

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Void or simply invalid?

8. A notice which fails to meet the mandatory statutory requirements will be void ab

initio i.e. it will be of no effect and the position is as if no notice has been served.

This tends to favour the person who served it, as it means that the tenant can

immediately serve a fresh notice which does comply.

9. In contrast where a notice which meets the mandatory statutory requirements

has been served, but the tenant or tenants do not meet the eligibility criteria that

no notice will need to be withdrawn and that withdrawal will trigger the statutory

“cooling off” period whereby a new notice cannot be served for 12 months (s. 13

(9) and s. 42 (7)). Take for example a case where a tenant claims a lease

extension but he has not owned the property for two years. Such a notice will

need to be withdrawn and the tenant will have to wait a year before serving

notice.

What mistakes will lead to invalidity?

10. In the past we would have talked about which provisions are mandatory and

which directory but those labels are now frowned upon:

“24 Where a statute lays down a process or procedure for the exercise or

acquisition by a person or body of some right conferred by the statute,

and the statute does not expressly state what is the consequence of the

failure to comply with that process or procedure, the consequence used to

be said to depend on whether the requirement was mandatory or

directory. If, on the proper interpretation of the statute, it was held to be

mandatory, the failure to comply was said to invalidate everything which

followed. If it was held, on the proper interpretation of the statute, to be

directory, the failure to comply would not necessarily have invalidated

what followed.

25 That approach is now regarded as unsatisfactory since the

characterisation of the statutory provisions as either mandatory or

directory really does no more than state a conclusion as to the

consequence of non-compliance rather than assist in determining what

consequence the legislature intended. The modern approach is to

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determine the consequence of non-compliance as an ordinary issue of

statutory interpretation, applying all the usual principles of statutory

interpretation. It invariably involves, therefore, among other things

according to the context, an assessment of the purpose and importance of

the requirement in the context of the statutory scheme as a whole.”

Natt v Osman [2014] EWCA Civ 1520

Saving notices

11. There is a statutory saving clause which covers “any inaccuracy in the

particulars” or “any misdescription of the property” (Sched. 3 para. 15 (collective

claims) and Sched. 12 para. 9 (individual claims)). Ironically the existence of the

saving clause is a factor which makes the court lean towards a tougher approach

in applying the test in Natt. “Inaccuracy in the particulars” has been construed

narrowly (Cadogan v Morris (1999) 31 HLR 732). Where the notice omits to

include property or includes the wrong property it is probably not a case of

misdescription and the notice will need to be amended (Malekshad v Howard de

Walden (No. 2) [2004] 1 WLR 862 (a case on a similar provision of the 1967 Act).

12. Where the notice attempts to comply with the statutory provisions but there is an

obvious mistake there is some scope for the Mannai doctrine but where the

statutory language is explicit the scope may be limited (Burman v Mount Cook

[2002] Ch 256).

Costs of an invalid notice

13. Where a purported initial notice is held to be invalid, there is often an argument

over the costs incurred in relation to that notice. The arguments were rehearsed

in relation to a Right to Manage (RTM) notice in Plintal SA and Another v 36–48A

Edgewood Drive RTM Co Ltd and Another 2008 (Unreported 2008). Although

that case related to different statutory provisions, the arguments were similar.

The tenant’s argument was that as no valid notice had been served, the

obligation to pay the landlord’s costs has not been triggered. The landlord’s

argument was that the RTM companies were estopped from denying the

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appellants’ right to costs having maintained until the first Leasehold Valuation

Tribunal hearing that the claim notices were valid and properly served. The

landlord relied on a passage from Hague on Leasehold Enfranchisement, (Sweet

& Maxwell, 6th edn, 2009 which expresses the view that where a purported initial

notice (under section 13 of the 1993 Act) is served which turns out to be invalid,

the nominee purchaser and participating tenant are estopped from denying that

costs under section 33 are payable at any time while they assert that it is a valid

notice. That argument had been followed in two earlier Tribunal decisions, and

the Lands Tribunal also acceded to it, stating that by maintaining their application

to the Tribunal the RTM companies were asserting that the claim notices were

valid and were validly served.

14. The matter is not, however, beyond doubt, as more than a mere assertion of

validity is necessary to found an estoppel. This was examined in Sinclair

Gardens Investments (Kensington) Ltd v Poets Chase Freehold Company Ltd,

where Morgan J had to consider whether a tenant who had served two initial

notices was estopped from denying the validity of the earlier of the two notices,

which the judge had held to be invalid. Morgan J pointed out that the argument

based on estoppel requires one to examine the following ingredients of an

estoppel. Did the tenants make a relevant representation? Did the landlord rely

on that representation? Was the landlord’s reliance sufficiently detrimental? In all

the circumstances, is it inequitable for the tenants to go back on any such

representation?

15. The judge expressed some doubt as to whether a notice necessarily contains a

representation as to its own validity, but did not have to decide the point as he

held that the landlord did not rely on its validity. Where a notice is served by a

tenant and its validity is challenged by the landlord, it is difficult to see how the

landlord has relied on the notice and if he subsequently expends money on

surveyors or in investigating the tenants’ title there is a good argument that the

tenant is not estopped from denying the validity of the notice in any argument

over those costs.

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Commonly encountered problems

Generally

Service at the wrong address. If possible serve at the address given for the

purposes of s. 48 LTA 1987 or s. 47 LTA 1987. Service will be deemed effective

even if the notice does not come to the attention of the landlord.

If serving on an agent, obtain written confirmation that he has authority to receive

the notice. If the agent is not a solicitor obtain written confirmation from the

principal that the agent is authorised.

Method of service used is ineffective. Where there is no address under s. 47 or

48 LTA 1987 there are no provisions in the 1993 Act deeming service to have

been effected if a particular method is used. Notices sent by recorded delivery

can be returned in the post. If in doubt use recorded delivery, ordinary post, and

delivery by hand.

Failing to register a notice at HM Land Registry. If it is not registered it will not

bind successors in title.

Collective enfranchisement

Failure to clearly differentiate the specified premises (i.e. the building containing

the flats) from appurtenant property and property used in common with other

tenants such as gardens (either on the plan or in the body of the notice).

Serving a single notice in respect of more than one block of flats.

Stating a composite proposed purchase price for the specified premises, the

appurtenant property and property used in common, and any leasehold interest.

Each must be stated separately.

Stating a purchase price for the specified premises which is so low that it could

not be considered to have been realistic or made in good faith.

Entering £0 or “none” in respect of the appurtenant property, property used in

common, and/or any leasehold interest – this is sometime done in the mistaken

belief that there is no such property but will arguably make the notice void.

Failure to give adequate notice in the date for response i.e. stating a date less

than 2 months after the notice was served. This can easily happen if there is a

delay in obtaining a tenant signature.

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Failure to serve all relevant landlords – this will only cause the notice to be void

where the landlord in question was served with a section 11 notice and notified

the tenant in response of his interest.

Failure to ensure that the notice is signed on behalf of all participating tenants.

Failing to appreciate the “3 flats” rule – i.e. section 5 (5).

Attaching signature sheets of tenants to a notice which they have not had an

opportunity to see.

Muddling the price to be paid to the freeholder and the sums to be paid to

intermediate lessees.

Individual lease extension

Failure to serve a third party to the lease. This is the most common error and is

inevitably fatal.

Failure to state a separate sum in respect of the interest of any ‘other landlord’.

Where there are intermediate lessees, confusing the meaning of ‘premium’ – this

is not just the sum payable to the competent landlord, it includes marriage value,

some of which will be shared with intermediate lessees.

Stating a purchase price for the new lease which is so low that it could not be

considered to have been realistic or made in good faith.

Failure to give adequate notice in the date for response, i.e. stating a date less

than 2 months after the notice was served.

Failure to serve all relevant landlords – this will only cause the notice to be void

where the landlord in question was served with a section 41 notice and notified

the tenant in response of his interest.

Failure to ensure that the notice is signed by the tenant personally or an

authorised agent.

Service of the notice prior to tenant having been registered as tenant at HM Land

Registry for 2 years.

Failure to give particulars of all leases where section 7(6) is relied upon (i.e.

tenant relies on more than one lease e.g. lease of flat and garage).

Failure to give proper particulars of terms to be included in new lease where

tenant relies on section 7(6) (e.g. failure to refer to terms relevant to garage). Err

on the side of caution apply the contractual test: are the terms stated with

sufficient precision as to be capable of acceptance?

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Failure to properly assign the benefit of the notice. It is common when a flat is

being sold for the vendor to serve a notice and assign it to the purchaser. The

benefit of the notice must not subsist apart from the lease so most precedents

are expressed so that the benefit is transferred on registration. Issues can arise

where there is a mistake in the notice and a replacement is needed.

Observing time limits

Summary of main events which will lead to a deemed withdrawal of tenant’s

notice (collective and individual enfranchisement)

Collective enfranchisement

Where the counter-notice does not admit that the participating tenants are

entitled, and no application is made by the nominee purchaser for a declaration

that they were so entitled within 2 months from the giving of the counter-notice

(s. 29 (1)).

Where the counter-notice admits the right but any of the terms of acquisition

remain in dispute at the end of the period of 2 months from the giving of the

counter-notice, and no application is made within 6 months from the date the

counter-notice was given (s. 29 (2)).

Where the reversioner failed to serve a counter-notice and no application is

made under s. 25 (for an order determining the terms of acquisition in

accordance with the initial notice) within 6 months of the date that the counter-

notice should have been given (s. 29 (3)).

Where an application has been made to the court for an order under s. 25, and

no application is made within 4 months and 21 days from the court order (s. 29

(4)).

Note this list is not a conclusive list – see s. 29 (5).

Individual lease extension

Where the counter-notice admits the right to a new lease but no application is

made to the LVT within 6 months of the counter-notice (s. 53 (1) (a))

Where the counter-notice admits the right to a new lease and all the terms of

acquisition have been either agreed or determined by the LVT but no application

has been made to the court within 4 months (where the terms were agreed) or 4

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months plus 28 days (where the terms were determined by the LVT) (s. 53 (1)

(b)).

Where the landlord fails to serve a counter-notice and no application is made to

the court within 6 months from when the counter-notice should have been given

(s. 53 (2)).

Where the terms of acquisition have been determined under s. 49 (i.e. where L

failed to serve C-N), and no application is made within 4 months + 21 days from

the court order.

Note this list is not conclusive see s. 53 (4).

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Problem

Hounds Gate House, London, NW6 is a house originally converted into four flats,

known as flats A to D. The premises also include a large garden and garages to

the rear. The flats are all held on long leases granted at roughly the same time

and expiring in 2020, except for Flat A which has been extended and will expire

in 2110. The freeholders are Robert Donat and Jimmy Durrante. They have

recently created a flat in the attic and unbeknown to the tenants have granted a

long lease of that flat to Robert Donat’s daughter, Jane Donat.

By the terms of their leases the tenants have the right to use the garden.

Flats A and B are owned by Ann Dvorak. Flat C is owned by William Farnum Ltd.

Flat D is owned by D & D Ltd another company controlled by Robert Donat and

Jimmy Durrante .

Flat A is a ground floor flat and Ms Dvorak has recently obtained planning

permission to create a substantial basement beneath the flat. She would need

the freeholder’s permission to do this.

The Ann Dvorak and William Farnum Limited serve an initial notice in the form

set out below. The tenants fail to register the notice at the Land Registry.

Following service of the initial notice Robert Donat and Jimmy Durrante grant a

999 year lease of Flat D and an adjacent part of the garden to a company they

control D & D Ltd.

Clayburgh and Clooney solicitors act for Donat and Durrante. They serve a

counter notice in the form set out below. The notice was served under cover of a

letter which states that it is served without prejudice to the validity of the notice.

A week later Gasteyer and Gould solicitors write to the nominee purchaser

stating that they act for Pia Zadora and Dick Dale who have bought the freehold

from Messrs Donat and Durrante. The letter states that the notice was not

registered and therefore it does not bind Miss Zadora and Mr Dale.

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LEASEHOLD REFORM, HOUSING AND URBAN DEVELOPMENT ACT 1993

(“the 1993 Act”)

INITIAL NOTICE PURSUANT TO SECTION 13

To: Robert Donat and Jimmy Durrante

of: Tanfield Chambers London WC1R 4JH

The Participating Tenants whose names and addresses appear in Schedule 1 to this

notice

Give you notice that:

1. The property of which the freehold is proposed to be acquired by virtue of section

1(1) of the 1993 Act is known as Hound’s Gate House, Lymington Road, London,

NW6 1HY (the “specified premises”), and is shown on the accompanying plan

edged in red.

2. There is no property of which the freehold is proposed to be acquired by virtue of

section 1(2)(a) of the 1993 Act.

3. It is proposed that the following rights should be granted in connection with the

acquisition of the freehold referred to at paragraphs 1 and 2: none.

4. The grounds upon which it is claimed that the specified premises are premises to

which Part I Chapter I of the Act applies are:

(i) they consist of a self-contained building [or part of a building];

(ii) they contain 4 of flats;

(iii) they contain 4 flats held by qualifying tenants;

(iv) accordingly the total number of flats held by qualifying tenants is not

less than two-thirds of the total number of flats contained in the premises.

5. The leasehold interest(s) proposed to be acquired under or by virtue of section

2(1)(a) or (b) of the 1993 Act [is] [are] [specify them ]:] none.

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6. The flats or other units contained in the specified premises in relation to which it

is considered that requirements in Part II of Schedule 9 apply are [specify them

]:] none

7. The proposed purchase price for the freehold interest in the specified premises is

£160,000.

8. The proposed purchase price for the property within paragraph 2 of this notice is

£[insert the figure ] none.

9. The proposed purchase price for each of the leasehold interest(s) within

paragraph 5 of this notice is £[specify sum for each interest] none.

10. The full names of all the qualifying tenants of flats in the specified premises, with

the addresses of their flats and the particulars required by the Act, are as follows:

See Schedule 2.

11. The full name(s) of the person(s) appointed to act as the nominee purchaser for

the purposes of section 15 of the Act is Hound’s Gate House Freehold Limited:

12. The address in England and Wales at which notices may be given to the

nominee purchaser under Part I Chapter II of the Act is 32 Bedford Row, London

WC1R 4JH.

13. The date by which you must respond to this notice by giving a counter-notice

under section 21 is 30th December 2014.

14. A copy of this notice has been sent to the following relevant landlords [insert full

name(s) and address(es) of any relevant landlords ].] none.

DATE: 27th October 2014

Schedule 1

(For the purposes of the problem question Schedule 1 gives accurately the name and

address of the participating tenants).

Schedule 2 gives the names and addresses of the 4 original tenants and accurate

particulars of their leases but omits to refer to the lease of Jane Donat

The notice is signed by each of the participating tenants.

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Plan:

Hounds Gate

House

Lymington

Villas

Alvanley Villas

Lymington Road

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LEASEHOLD REFORM, HOUSING AND URBAN DEVELOPMENT ACT 1993

COUNTER-NOTICE ADMITTING THE CLAIM

Re Hound’s Gate House

To: Hound’s Gate House Freehold Limited of 32 Bedford Row London

From: Robert Donat and Jimmy Durrante (“the reversioner”)

The reversioner hereby gives you notice as follows:

1. The reversioner admits that the participating tenants were on the

relevant date entitled to exercise the right to collective enfranchisement

in relation to the specified premises.

2. The reversioner does not accept the premium proposed in the initial

notice.

3. The following copy notices received or given under sections 42 or 45

accompany this counter-notice: none.

4. The specified premises [are/are not] within the areas of an estate

management scheme approved under section 70 of the Act.

5. The address in England and Wales at which notice may be given to the

reversioner is 32 Bedford Row London WC1R 4JH:

Dated 5th November 2014

Signed

(For the purposes of the problem question assume that the signatures of

Messrs Donat and Durrante follow).

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Problem questions

1. Are the tenants entitled to purchase the garden in principle?

2. Are there any problems with the initial notice?

3. Is the grant of the 999 year lease to D&D Ltd effective?

4. What would the position have been if the initial notice had been registered?

5. What is the effect on valuation of the grant of the lease to D&D Ltd?

6. Are there any problems with the counter-notice?

7. Is it open to Donat & Durrante to accept the price stated in the initial notice

notwithstanding that there has been a change in valuation of the freehold?

8. What is the effect on valuation of the reversion of the grant of planning

permission in respect of Flat A?

9. Are Gasteyer and Gould correct about the need for registration and the effect of

the assignment of the freehold? If they are, is there a deemed withdrawal

preventing the tenants from serving another notice?

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Answers 1. Yes – it doesn’t have to be demised to the tenants it is enough that they have rights in

common to use it see s. 1 (3).

2. Yes – funnily enough there are two:

a. The first is that the notice has failed to distinguish between the “specified premises” which consist only of the main building and the other land such as the garden and garages. The saving provisions at Sched 3 Para 15 probably cures the misdescription but as a result of the same mistake the notice fails to state a price payable for the garden and garages, which is require by s. 13 (3) (d) (ii). It is arguably invalid. There are conflicting county court decisions but the decision in Natt v Osman means the court is likely to take a less forgiving approach. See below for how it should be done.

b. The other is the same mistake made in Natt the notice fails to identify all the QTs. It does not matter that the landlord has not been misled. The mistake is fatal.

3. Yes – see s. 97 and s. 19. The notice would need to be registered to have any effect on

dispositions by the landlord.The inclusion of the garden would mean that the lease of that part would be a relevant disposal under the LTA 1987. In any event the demise of the garden would be subject to the prior right of the tenants to use it in common.

4. If the notice had been registered then the grant of the lease of the flat would have been a permitted disposal unless it fell within s. 153 LPA 1925 and was thus capable of being unilaterally converted into a freehold interest - Cadogan v Panagopoulos [2010] L. & T.R. 13. The demise of the garden would, however, contravene s. 19 (1) (a) (ii) as the garden would have been liable to acquisition under s. 2 (1) (b). To that extent the lease would be void.

5. It would diminish the value of the freehold substantially as there would be minimal value attached to the reversion of Flat D.

6. Yes. The notice does not accept the premium but makes no counter-proposal. That will invalidate the notice-Burman v Mount Cook [2002] Ch. 256. Further it makes the same mistake as occurred in 7 Strathray Gardens v Pointstar Shipping & Finance Ltd [2004] EWCA Civ 1669 in that it does not say whether the premises are within the area of an estate management scheme.

7. No. The property must be valued subject to the burdens which exist at the date of the conveyance (Sched 6 para 3 (1A)). The offer in the notice cannot be accepted in the counter notice.

8. The grant of planning permission occurred prior to valuation date. Itincreases the value of the reversion as the freeholder will expect to profit from giving permission for the development. That value is properly characterised as marriage value and no marriage value is payable due to the lease exceeding 80 years (Schedule 6 (paragraph 4 (2A)). The landlord can, however, recover the value as development hope value (Money v Cadogan [2013] UKUT 211 (LC).

9. G&G are on the ball see s.97 and s. 19 the protection against the landlord making disposals is not engaged unless the initial notice is registered – the new freeholder would take free of the nominee purchaser’s claim. It is suggested there is no deemed withdrawal under s. 29 vis a vis the new purchaser so s. 13 (9) does not apply. The tenants could serve a fresh notice.

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Correct: Wrong:

Hounds Gate

House

Garages

Hounds Gate

House