What goes up may have to come down – airspace development –v– enfranchisement
The Court of Appeal recently handed down its decision in LM Homes Ltd V Queen Court Freehold Company Ltd [2020] EWCA Civ 371.
The case concerned enfranchisement in respect of a freehold and three leases but the focus here relates to one particular lease granted in respect of airspace above the building and the residents' claim to acquire that lease under the Leasehold Reform Housing and Urban Development Act 1993. As a quick refresher on the law this creates a mechanism by which a majority of qualifying tenants can compel the freeholder to transfer to them the freehold title to the estate. That is the well-known part of the legislation but there are two additional provisions which lead in to the claim set out in this case.
If the residents validly claim the transfer of the freehold they are required to also take an assignment of any intervening leases and in addition have the right to require assignment of leases of common parts where acquisition is reasonably necessary for the proper management or maintenance of those common parts.
The challenge to developers
This presents developers of airspace with a difficulty since in this case the lease of the airspace had clearly been granted with a view to future development. What this case now presents is an option over any such lease in favour of the qualifying tenants who can acquire that lease at open market value. The valuation point has yet to be resolved and no doubt there will be further news on that in due course but there are two fundamental questions for any developer contemplating an airspace development: (i) can the development be built and (ii) can it be funded.
Funding
Taking the second question first we have sampled the response of some of our client lenders and the initial reaction is that this is in principle a question of valuation. So long as the value is not affected then the bank retains its security since they could not expect to sell at greater than open market value anyway and that is the figure at which the residents would acquire the lease. There is a possibility that the LM Homes decision will render such leases worthless if it is assumed that developers will be unwilling to pay for a lease which is subject to a statutory option so this may still present a problem but if a bank requires an unencumbered lease as security solicitors will have to qualify their reports on title. We will have to await the outcome of the final arguments to assess the impact on value so the jury is, almost literally, out on that point.
Development
Looking at the first question, whether development can be carried out, the answer is more complex.
There are many grounds on which the decision in LM Homes can be criticised. On the specific point of what constitutes "common parts" it has taken precedent from a case (Dartmouth Court Blackheath Ltd v Berisworth Limited [2008] EWHC 30) decided under a different Act, the Landlord and Tenant Act 1987, and not only is that a different Act considering a different legal principle relating to pre-emption rights but the judge in that case specifically said that the definition of "common parts" for that Act should not be taken as precedent under any other legislation, especially under the 1993 Act – yet that is exactly what the court has done.
The Court of Appeal seems to have concluded without specific argument on the point that anything which is not private is automatically "common parts" but that does not reflect reality. There are some areas through which access is required of necessity and without which a flat is useless, such as internal staircases and hallways, while in other cases the reverse may be true - access might be required through private areas for example going through flats to reach services or to replace windows where these are retained by the landlord. In some cases, such as roof space, access is needed only intermittently, as and when work is to be done. In that way it has more in common with the private areas than with, for example, the main entrance.
Exceptions from the 1993 Act
Comment has been made that the court looked at the purpose of the lease but that raises a more technical question over the circumstances in which the purpose of the lease and the practical use to which that part of the property is put play a role in deciding whether the lease may be acquired by the tenants.
The case of Dolphin Square became known for reasons connected with the definition of "qualifying tenant" but buried in the case was an issue concerning leases areas which constituted separate business units, one being a laundry area. The principle is that an area in a property to which the 1993 Act applies which is separately leased and is operated as a separate business unit is not subject to the tenants' collective right to require assignment.
An example: a block of flats with a gym in the basement. If that gym is operated as part of the service charge and is available to the residents simply through dint of their status as residents then it does not constitute a separate business. If however it is let to a commercial operator then it does amount to a separate business and lies outside the scope of the 1993 Act.
Assuming that building work starts then it is hard to see how an argument can be made that airspace still represents common parts or that it is anything other than a separate business unit.
But does that apply while surveys and measurements are being taken for design, planning permission and commissioning construction contracts?
Where do we go from here
Sadly the matter will not be appealed to the Supreme Court for a deeper consideration and many of these issues were either not argued in the case or lie outside the strict limits of the decision but as things stand there is an unwelcome question mark over how developers might address the issues raised by this case.
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