A recent decision by the Upper Tribunal in the case of LM Homes Ltd and Others v Queen Court Freehold Company Ltd [2018] UKUT 367 (LC) has highlighted the difficulties that freeholders and developers can face in realising development or development hope value, when confronted with a collective enfranchisement claim.

In this case, the Tribunal determined that:

• the basement, subsoil below the building and airspace above constituted common parts; and
•  the nominee purchaser was entitled to acquire these areas, provided that the interests in question were ‘reasonably necessary for the proper management or maintenance of those common parts’.

This decision is perhaps not surprising, but will be frustrating for investors and developers who will find it increasingly difficult to ring fence parts of a building for development. It has become clear that the only way to create certainty over developable parts of a building, which qualify for collective enfranchisement, is to actually develop them before a claim for collective enfranchisement is made.

The case

The property was a purpose built block of flats comprising 45 flats over eight floors, and a basement which stored the water tanks, boilers, oil tanks and electrical switchboards which serve the whole building (“the Building”).

The tenants of the majority of the flats exercised their right to buy the freehold of the Building by serving a notice under the Leasehold Reform Housing and Urban Development Act 1993 (“the Act”). An agreement was reached regarding the terms of acquisition of the freehold, the headlease, and the intermediate leases of 10 of the residential flats. The transfers of these interests were completed.

However, the landlord disputed the tenants’ right to acquire the leases of the airspace, basement (including the staircase) and subsoil as they wished to retain the area for redevelopment purposes.

The two issues faced by the First Tier Tribunal were:

1.  Did the tribunal have jurisdiction to determine the terms of acquisition of the leasehold interest in relation to the air space, basement and the sub soil once the acquisition of the remaining interests had been completed?This issue arose due to the fact that a binding agreement had already been completed in relation to these interests in the Building.

   The Tribunal agreed with the leaseholder that the proper construction of section 13(11)(a) of the Act involves reading the word “contract” to mean both singular and plural. Section 6(c) of the Interpretation Act 1978 provides that, in any act, unless the contrary intention appears, words in the singular include the plural and vice versa. Therefore the initial notice should continue in force until contracts or vesting orders in relation to the remaining interests had completed.

   In addition, section 24 of the Act gives the Tribunal the right to determine disputes where “any of the terms of acquisition” remain in dispute. Therefore it is apparent that the Tribunal retains jurisdiction for so long as there remains a disagreement over ‘any of the terms’ of acquisition. Accordingly, the first ground of appeal was dismissed.

2.  If the Tribunal had jurisdiction, was the nominee purchaser entitled to acquire the lease of the air space, basement and the subsoil?To determine this question the Tribunal needed to consider whether the basement, subsoil and airspace were common parts.

   Section 101(1) of the Act defines common parts as ‘in relation to any building or part of a building, includes the structure and exterior of that building or part and any common facilities within it’.

   In the case of Cadogan v Panagopoulos [2010] EWHC 422(Ch) it was held that there is no requirement for the area to be used by all the residents, but it was necessary to bear in mind the function served by an area when considering whether it qualifies as a common part.

   Applying the above to the basement, although the tenants may never make use of the area, as it contains the service installations for the whole building, the Tribunal held that if the purpose of a particular room is to accommodate service installations for the whole building, then it is sufficient to render the whole of that space as a common part. The Tribunal stated that if the basement was not acquired, there could be severe practical implications to the tenants as they would not be able to carry out service or replacement works on any of the boilers.
   In relation to the subsoil, the Tribunal believed that it would be classified as a common part, as without it, the structure of the Building would be compromised if development was permitted.

   The Tribunal agreed that the subsoil was within the extended meaning of common parts due to it being part of the exterior.

   The Tribunal stated that the question that needed to be asked was whether the acquisition of the subsoil is reasonably necessary for the proper management and maintenance of the subsoil? In answering this, the Tribunal found that although the possibility of the subsoil needing maintenance was low, the lease was for 999 years and therefore it may at some point need to be managed. Also, under the terms of the lease, the Landlord covenanted to keep the whole of the grass, planted and landscaped area mowed and planted in good and tidy condition. Should permission be granted to develop the subsoil, they would no longer form part of the common parts, therefore rendering it impossible for the Landlord to comply with the covenant.

   The final area to be considered was the airspace lease.

   No part of the physical structure of the building was contained in this lease; it related solely to the airspace above the surface of the roof. The Tribunal found that the airspace above a building is regarded as part of the exterior of that building and therefore it was a common part. In addition to that, the Tribunal stated that the airspace also provides access to the roof of the Building, which is required whenever works of repair or maintenance are to be undertaken. The airspace of a Building can also be a location for satellite dishes or aerials, which much like the boiler room in the basement, serves the whole Building.

Conclusion

This judgement could have practical implications for freeholders as it could mean it is increasingly difficult to ring- fence interests in residential buildings which have the potential for future development. Similarly, when building a property, developers should always consider collective enfranchisement rights, particularly if on completion there is scope for additional development to be carried out at a later date.

Leaseholders pursuing collective enfranchisement claims should also be aware of what constitutes common parts of their buildings, especially if the terms of their lease confer the obligation on them to maintain such areas.