Conscious uncoupling via enfranchisement

In R (on the application of Annington Property Ltd and others) v Secretary of State for Defence and others [2023] EWHC 1154 (Admin), the High Court has ruled the defendant was entitled to enfranchise eight houses occupied by families of military personnel under the Leasehold Reform Act 1967. The agreement In 1996, in a deal now regarded as disastrous for taxpayers, the Ministry of Defence entered into a £1.7bn sale -and-leaseback arrangement with Annington Property Ltd in relation to its service family accommodation, comprising 765 sites and more than 55,000 residential units across England and Wales. For each site APL was granted a 999-year headlease and the MoD took an underlease for a 200-year term.  In an attempt to reduce the public sector debt and to gain commercial leverage in its dealings with APL, the defendant sought to enfranchise two houses in Cranwell, Lincolnshire, and six houses in Bristol, under the 1967 Act.  The structure At the material time of the deal, the defendant was debarred from enfranchising because the 1967 Act required the tenant to occupy the home as their only or main residence. That requirement was abolished by section 138 of the Commonhold and Leasehold Reform Act 2002.  In Gratton-Storey v Lewis and another [1987] 2 EGLR 108, it was decided that a sub-tenant who does not hold the freehold reversion of property could serve a notice to enfranchise in order to acquire both the freehold and any intermediate interest. This did not apply where the sub-tenant already owned the freehold, but this problem could be circumvented by transferring the freehold to a nominee.  The defendant created an analogous structure by incorporating Defence Infrastructure Holdings Ltd as a special purpose vehicle to hold the freehold of the properties to be enfranchised. DIHL was under the absolute control of the defendant, which was its only shareholder. Its directors were senior civil servants in the MoD.  Houses at Cranwell and Bristol were identified as test cases and freeholds were transferred to DIHL before enfranchisement notices were served.  Common parts underlease The Bristol site comprised only the six dwellings and their gardens which were the subject of the enfranchisement notices. The Cranwell site contained, in addition to the two properties, 95 other dwellings and 37 separate garage units together with common parts, which included estate roads, footpaths, parking and amenity areas.  With the intention of avoiding any occupation of areas under the 200-year underlease which could result in it being treated as a business tenancy under the Landlord and Tenant Act 1954, the defendant granted a sub-lease of the common parts of the Cranwell site to DIHL for six years at a peppercorn rent. Facilities management services in relation to the common parts continued to be provided by contractors responsible for the SFA estate.  The issues The principal questions for the court were: 1. Was the claimant’s consent to enfranchise required? 2. Did the defendant satisfy the 1967 Act requirements to enfranchise? In particular:  a. What was the effect of the decision in Gratton-Storey? b. Were the Cranwell properties excluded tenancies? c. Were the defendant’s underleases business tenancies? Consent Section 33 of the 1967 Act confers a right to enfranchise on a tenant who “holds a lease from the Crown”. Where a Crown tenant does not have a statutory right to enfranchise, they may be able to rely on a published undertaking by the Crown to abide by the 1967 Act.  APL argued the freeholds of the properties remained in the ownership of the Crown throughout, due to the doctrine of Crown indivisibility. Accordingly, the defendant required APL’s consent to enfranchise pursuant to the Crown’s undertaking.  The High Court disagreed. The High Court found the ambit of Crown indivisibility was not as broad as APL contended. Further, it concurred with the parties that, under section 33(1), a tenant or sub-tenant was able to exercise the right to enfranchise under the statute once there ceases to be a Crown interest in the land. A “Crown interest” includes an interest belonging to a government department or held on behalf of His Majesty for the purpose of a government department, and the minister in charge of that department. The defendant’s transfer of the freehold of seven of the eight Cranwell and Bristol properties to DIHL meant there ceased to be a Crown interest in those properties, superior to his underlease.  The defendant was able to enfranchise by virtue of section 33(1). For the remaining property, the defendant was able to rely on the notice served pursuant to section 33(1)(b) of the 1967 Act. Gratton-Storey APL also relied on Crown indivisibility to assert that the principle in Gratton-Storey was engaged. APL argued that, as both the sub-tenancy and the freehold reversion were vested in the same entity, enfranchisement under the statue was not permitted.  Paying short shift to this argument, the High Court observed that, as a matter of private law, where a sub-tenant had transferred its freehold interest to a nominee it could enfranchise and acquire intermediate interests under the 1967 Act.  There was no reason why the analysis should be different when a government minister transferred his interest to a corporate body with a separate legal identity or to treat that transfer as a transfer to an entity of the Crown.  A basic tenet of company law was that a body corporate had a separate legal identity and personality from its shareholders and the persons in control.  Excluded tenancy Section 1AA(3) of the 1967 Act excluded from the additional right to enfranchise certain houses in rural areas where the freehold and the adjoining land were owned since 1 April 1997 and the land was not occupied for residential purposes. In such circumstances, the tenant was precluded from enfranchising unless the tenancy passed the low rent test.  The claimants argued that two of the Cranwell properties were excluded tenancies under the “adjoining land” test.  Analysing the facts so as to avoid arbitrary distinctions between different parts of estates, the High Court determined that one of the disputed areas was not in fact “adjoining land”.  Further, the court found the disputed areas were occupied for residential purposes. It was unlikely that parliament intended rural properties that formed part of an estate where amenity areas were retained by a developer or where the property was close to a grass verge separating it from an estate road, to be excluded from the right to enfranchise under section 1AA.  Business occupancy The 1954 Act applies where the demised property is or includes premises “occupied” for the purpose of a business – including a trade, profession or employment – carried on by the tenant or for those and other purposes.  Section 56 of the 1954 Act provides that the 1954 Act applies where the tenancy is held by or on behalf of a government department and includes property occupied for the purposes of a government department. This includes rent-free accommodation.  The court rejected the claimant’s argument that whether premises are occupied for the purposes of a government department is to be considered from the perspective of the tenant rather than the occupier. Occupation and its purposes must be assessed from the purpose of the occupier.  Two parties holding different interests cannot both occupy property for business purposes – the single business tenancy principle (Graysim Holdings Ltd v P&O Property Holdings Ltd [1994] 2 EGLR 78. So where a sub-tenancy is occupied for the purpose of a business, the protection of the 1954 Act transfers from the tenancy to the sub-tenancy. There was no reason why the single business tenancy principle or the rules relating to sub-letting did not apply in the context of section 56. Who was in occupation?  A service occupancy arises and a licensor is deemed to be the occupier of property where either (i) it is essential to the performance of the licensee’s duties that, as a matter of fact, they should occupy a particular property; or (ii) the licensee is required by contract to occupy the property and, as a matter of fact, by doing so they are better able to perform their duties Ludgate House Ltd v Ricketts (VO) and another [2023] UKUT 36 (LC); [2023] EGLR 19. The defendant provided SFA for use by service personnel under licence but there was no requirement in their terms of service that they live in it. SFA was one of a range of occupation options open to service personnel. Consequently, despite wording in the service licence to the effect that occupation of the property was required for the better performance of the service, the arrangement was not a service occupancy. The licence provisions – despite their label – were consistent with the licensee having exclusive occupation of the house as their personal residence.  None of the eight houses were occupied by the defendant and/or for the purposes of a government department at the time when each relevant enfranchisement notice was served. The same reasoning applied to other properties at the Cranwell site.  While, in principle, the carrying out of maintenance on the common parts of the Cranwell site could amount to a business activity sufficient to constitute occupation for 1954 Act purposes, there was little evidence of DIHL being in occupation when the enfranchisement notices were served. However, the defendant’s purpose in creating the common parts underlease of the Cranwell site – to avoid the defendant occupying those premises as a business tenant – was relevant. The court concluded that DIHL was the occupier under the 1954 Act and so the Cranwell underlease was not excluded from enfranchisement.  Louise Clark is a property law consultant and Elizabeth Dwomoh is a barrister at Lamb Chambers Image © Pexels/Polina Tankilevitch