Circumventing the right of first refusal

Elizabeth Dwomoh takes a look at an interesting case arising from a breach of the right of first refusal under the Landlord and Tenant Act 1987. Key points The definition of “incumbrances” under section 12B(5)(b) of the Landlord and Tenant Act 1987 is not limited to registered estates or interest only An order made under section 19 of the Landlord and Tenant Act 1987 does not prohibit the granting of further interests or estates out of the freehold Under section 1 of the Landlord and Tenant Act 1987, qualifying tenants of a flat have “the right of first refusal” when their landlord seeks to dispose of their interest in the premises.  If a relevant disposal has taken place, a majority of the qualifying tenants can serve a purchase notice under section 12B compelling the new landlord to effect a transfer of its interest to the tenants’ nominee purchaser. If faced with non-compliance, the tenants can apply to the county court for an order under section 19 to enforce compliance. Under section 12B(5), unless the court orders otherwise, the nominee purchaser will acquire the premises free of any charges, but subject to any incumbrances, with the purchase price reduced to take into account the effect on the value of the premises acquired.  Is the definition of incumbrances in section 12B(5) limited to registered incumbrances only? The High Court has answered this question in Prescott Place Freeholder Ltd and others v Batin and another [2023] EWHC 435 (Ch). The parties A development at 34-36 Prescott Place, Clapham, SW4, comprised six residential flats. In 2004, the second defendant, Joseph Donovan, gave his brother monies to acquire the freehold interest in the premises. An express deed of trust was executed with Donovan’s brother holding the property on trust for him. In 2014, Donovan’s brother executed a transfer of the premises to the first defendant, Constantin Batin. The 2014 transfer was in breach of section 1. The second to eighth claimants, who were the long leaseholders of the flats, uncovered the 2014 transfer. In 2018, they served notice requiring Batin to transfer the freehold to their nominee purchaser, the first claimant – Prescott Place Freeholder Ltd. Batin failed to comply. The claimants subsequently issued proceedings in the county court for a section 19 order.  Legal gymnastics Batin was debarred from defending the claim in the county court, while Donovan applied to be joined as a party. Donovan argued that the 2014 transfer was not a relevant disposal under section 4(2)(g) because the premises were held on trust for him and the disposal had been made in connection with the “appointment of a new trustee or in connection with the discharge of any trustee”. Donovan’s application was refused and a section 19 order was made. In February 2020, the claimants applied to the First-tier Tribunal to determine the purchase price payable for the transfer of the freehold to Prescott Place Freeholder Ltd. Although Donovan was aware of the proceedings, he made no application to be joined to the FTT proceedings. Ultimately, the FTT determined the purchase price to be £125,000 – the sum paid by Batin. In November 2020, the claimants noticed “for sale” signs for two vacant flats in the premises. The claimants applied to the High Court for an injunction to restrain Batin from disposing of them. Donovan was joined to the proceedings.  During the High Court proceedings, notwithstanding that the section 19 order had been made, Donovan relied on the 2004 trust deed and another trust deed purportedly executed in 2014 that purportedly declared him to be the beneficial owner of the premises.  Additionally, Donovan argued that a constructive trust had arisen by virtue of the course of dealings between him and Batin. He additionally relied on his acquisitions of the equitable leases of the vacant flats, which he contended were executed in May 2014. The equitable leases were unregistered, and Donovan argued that Prescott Place Freeholder Ltd would acquire the freehold subject to those leases on transfer of the legal estate.  Abuse  The High Court found that both the 2014 trust deed and the equitable leases were executed after the section 19 order was made.  The High Court gave short shrift to Donovan’s argument that he had acquired an interest in the property by virtue of the 2014 trust deed. It found that his attempt to vindicate his rights in the High Court proceedings was an abuse of process within the meaning of Henderson v Henderson [1843] 67 ER 313. In short, Donovan should have raised the existence of his beneficial interest in the county court proceedings. Based on the evidence, the High Court found that a constructive trust had not arisen. The High Court determined that any attempt by Donovan to argue that the 2014 transfer gave rise to a constructive trust, which engaged the exemption under section 4(2)(g), should have been raised in the county court proceedings. Donovan could not mount a collateral attack on the making of the section 19 order in the present proceedings. Incumbrances The High Court was also critical of Batin and Donovan’s conduct in granting the equitable leases after the section 19 order was made. However, it determined that the definition of “incumbrances” under section 12B(5)(b) was not limited to registered estates or interest only. Batin, as the freeholder, was not debarred from granting further interests over the premises after the section 19 order was made. Elizabeth Dwomoh is a barrister at Lamb Chambers Photo © Caleb Jack/Pexels