Westbrook Dolphin Square Ltd v Friends Life Ltd
Landlord and tenant – Leasehold enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Claimant seeking to acquire freehold of large development through scheme granting underleases to tenants capable of invoking 1993 Act – Claimant acting as nominee purchaser – Whether tenant companies validly and independently exercising right – Whether scheme contrary to intent of 1993 Act – Claim allowed
The defendant was the freeholder of a substantial development London SW1 comprising several large buildings containing a total of 1,223 flats. The claimant company was part of a group that sought to acquire the freehold by means of a scheme involving the collective enfranchisement provisions of the Leasehold Reform, Housing and Urban Development Act 1993. This involved the creation of a number of companies and transactions in order to bring into existence various underleases to special purpose vehicles (SPVs), intended to be qualifying tenants who could invoke the 1993 Act. The tenants then brought an enfranchisement claim pursuant to section 13 of the 1993 Act, seeking to acquire the freehold through the claimant as nominee purchaser. A representative tenant was joined as third party.
In proceedings between the parties, it was established that the enfranchisement claim was not invalidated by the fact that the tenants had withdrawn their first notice and application in light of a fall in the residential property market and had subsequently issued a second notice and application. Reversing the decision of the High Court ([2011] EWHC 2302 (Ch); [2011] PLSCS 229), the Court of Appeal held that this had been contemplated by the 1993 Act and was not an abuse of process: see [2012] EWCA Civ 666; [2012] 2 EGLR 76; [2012] 32 EG 42. The substantive enfranchisement claim was then transferred from the county court to the High Court, which determined various issues relevant to the right to enfranchise.
Landlord and tenant – Leasehold enfranchisement – Leasehold Reform, Housing and Urban Development Act 1993 – Claimant seeking to acquire freehold of large development through scheme granting underleases to tenants capable of invoking 1993 Act – Claimant acting as nominee purchaser – Whether tenant companies validly and independently exercising right – Whether scheme contrary to intent of 1993 Act – Claim allowed
The defendant was the freeholder of a substantial development London SW1 comprising several large buildings containing a total of 1,223 flats. The claimant company was part of a group that sought to acquire the freehold by means of a scheme involving the collective enfranchisement provisions of the Leasehold Reform, Housing and Urban Development Act 1993. This involved the creation of a number of companies and transactions in order to bring into existence various underleases to special purpose vehicles (SPVs), intended to be qualifying tenants who could invoke the 1993 Act. The tenants then brought an enfranchisement claim pursuant to section 13 of the 1993 Act, seeking to acquire the freehold through the claimant as nominee purchaser. A representative tenant was joined as third party.
In proceedings between the parties, it was established that the enfranchisement claim was not invalidated by the fact that the tenants had withdrawn their first notice and application in light of a fall in the residential property market and had subsequently issued a second notice and application. Reversing the decision of the High Court ([2011] EWHC 2302 (Ch); [2011] PLSCS 229), the Court of Appeal held that this had been contemplated by the 1993 Act and was not an abuse of process: see [2012] EWCA Civ 666; [2012] 2 EGLR 76; [2012] 32 EG 42. The substantive enfranchisement claim was then transferred from the county court to the High Court, which determined various issues relevant to the right to enfranchise.
The issues for the court were: (i) whether the SPVs each had qualifying tenancies, or were precluded from having them by virtue of their being “associated companies” for the purposes of the 1993 Act; (ii) whether, in the light of the corporate and leasehold structures put in place by the claimant in order to provide an opportunity for enfranchisement which would otherwise not exist, the claimant was prevented from enfranchising because it was not the intention of Parliament to allow such schemes because they would circumvent the apparent intention of the statute (the “sham” point); (iii) Whether allowing enfranchisement would infringe the defendant’s rights under the Human Rights Act; (iv) Whether the defendant was entitled to argue the point that the building contained more than 25% of space occupied for non-residential purposes, when it did not take that point in its counter-notice; (v) Whether the building in fact contained more than 25% of such space so that enfranchisement was not permissible; (vi) Whether the tenants’ notice was ineffective because it did not “specify the proposed purchase price” within the meaning of the 1993 Act; and (vii) Whether, if the enfranchisement scheme would otherwise operate against the defendant, it was a “victim” of a transfer at an undervalue for the purposes of section 423 of the Insolvency Act 1986, and thereby avoid its consequences.
Held: The claim was allowed.
(1) The SPVs were not “associated companies” so as to preclude the enfranchisement claim on an application of section 5(5) of the 1993 Act Each company’s voting shares were owned 50% by a Westbrook company (LLC) and 50% by a separate company controlled by trustees with a complete discretion over voting. That was sufficient to give each SPV a qualifying tenancy. A discretionary trust was a discretionary trust, and a trustee’s discretion was a discretion. They were, a fortiori, uncontrolled and uncontrollable, in their execution and exercise, by outside parties if the control was said to be prescribing how discretions were to be exercised. That was true at a general level, and the express terms of the trust documentation made it clear in this case. In the normal case, and on the face of the documents in the present case, there was no basis on which it could be said that the voting rights were exercisable only on LLC’s instructions or with its consent or concurrence. Butt v Kelson [1952] 1 Ch 197 considered.
(2) Section 5 of the 1993 Act dealt with qualifying tenants. If a person who would otherwise be a qualifying tenant was actually the tenant of three or more flats, then that person was treated as the qualifying tenant of none of them. Subsection (6) treated “associated companies” as one for those purposes, so flats held by an associated company would fall to be treated as held by one tenant for those purposes. It was plain that the present structure was set up with a view to being able to enfranchise, and that it was done with an eye to sections 5(5) and 5(6) of the Act so that the SPVs were not controlled by any one body. It was an elaborate and carefully crafted scheme with no particular commercial purpose and done for enfranchisement purposes. However, the arrangements put in place by the claimant, against the statutory background, did not constitute an “artificial scheme” solely created for the purpose of enfranchisement. The court’s task was one of construction but to adopt a purposive construction where to apply the literal meaning of the legislative language used would lead to results which would clearly defeat the purposes of the Act, three conditions had to be fulfilled, as propounded by Lord Diplock in Jones v Wrotham Park Settled Estates [1980] AC 74: first, it was possible to determine from a consideration of the provisions of the Act read as a whole precisely what the mischief was that it was the purpose of the Act to remedy; secondly, it was apparent that the draftsman and Parliament had by inadvertence overlooked, and so omitted to deal with, an eventuality that required to be dealt with if the purpose of the Act was to be achieved; and thirdly, it was possible to state with certainty what were the additional words that would have been inserted by the draftsman and approved by Parliament had their attention been drawn to the omission before the Bill passed into law.
Not all holes, if identified, could be filled by the courts. The present case might or might not demonstrate a hole, but if it did, it was one which, similarly, could not be filled by what was otherwise a forced and illegitimate process of construction of words in the Act which were lighted on for that purpose. If one sought to apply Lord Diplock’s threefold test to the present situation, none of the limbs could be fulfilled: Jones v Wrotham Park Settled Estates [1980] AC 74 applied; Snook v London and West Riding Investments Ltd [1967] 2 QB 786, Ramsay v Inland Revenue Commissioners [1982] AC 300, Persey v Bazley (1983) 47 P&CR 37, Gisborne v Burton [1989] QB 390, Belvedere Court v Frogmore [1997] QB 858 and Bankway Properties Ltd v Pensfold-Dunsford [2001] 1 WLR 1369, Collector of Stamp Revenue v Arrowtown Assets [2003] 6 HKCFAR 517 and Smith v Jafton Properties [2012] Ch 519 considered.
(3) The defendant could not claim that its human rights had been breached since the scheme under the 1993 Act did not, of itself, infringe article 1 of the European Convention on Human Rights.
(4) The enfranchisement claim was not precluded, under section 4(1), on the ground that the building contained more than 25% of non-residential space. The defendant’s was entitled to argue that more than 25% of the space was occupied for non-residential purposes but that claim was rejected. The space in question was occupied by 147 flats let out on tenancies, primarily of up to 89 days duration, albeit five were let out for periods of three months or more and an additional 17 flats used as guest rooms which the defendant claimed amounted to non-residential use. However, the flats were used for the sort of living activities that went with residence and were fully self–contained flats, not analogous to hotel rooms and it was appropriate to characterise the occupation as being for residential purposes. For the time being the occupants were conducting residence-like activities there. That was the test, not whether they were using them as homes, or even residences. The shortness of the stay did not affect the characterisation of the occupation: Owen v Elliott [1990] 1 Ch 798, Urdd Gobaith Cymru v Commissioners of Customs and Excise [1997] V&DR 273, Burman v Mount Cook Land Ltd [2002] 1 EGLR 61; [2002] 06 EG 156, The Bishopsgate Foundation v Curtis [2004] EGLR 57, 9 Cornwall Crescent London Ltd v Kensington & Chelsea [2006] 1 WLR 118, Cawthorne v Hamdan [2007] Ch 187, Boss Holdings Ltd v Grosvenor West End Properties Ltd [2008] 1 EGLR 51; [2008] 15 EG 174, Marine Court [etc] Ltd v Rother District Investments Ltd [2008] 1 EGLR 39, Panagopoulos v Cadogan [2011] 1 EGLR 33; [2011] 2 EG 76, Farndale Court Freehold v G&O Rents (unreported, 7 October 2011), Hosebay v Day [2012] 3 EGLR 66, Fairhold (Yorkshire) Ltd v Trinity Wharf (SE16) RTM Co Ltd [2013] UKUT 0502 (LC), [2013] PLSCS 247, Smith v Jafton [2013] 2 EGLR 104 and Albion Residential Ltd v Albion Riverside [etc] Ltd [2014] UKUT 0006 (LC); [2014] PLSCS 56 considered.
(5) The enfranchisement claim was not invalidated by any failure of the claimant’s initial section 13 notice to specify the proposed purchase price. A proposed price in a section 13 notice had to pass a subjective, rather than objective, test. Although a tenant could not specify any price it wished, the criteria for validity did not depend on an objective test that required a tenant’s proposed to fall within reasonable valuation limits. Valuation matters were to be dealt with by the tribunal. Instead, the tenant’s figure had to be a genuine opening offer as opposed to a nominal figure. The claimant’s proposed price of more than £111m was a real, bona fide offer which was intended to be taken seriously and was not nominal in either absolute or relative terms on the fact of the case: Earl Cadogan v Morris [1999] 4 EGLR 59, 9 Cornwall Crescent London Ltd v Kensington and Chelsea [2006] 1 WLR 118 and Howard de Walden Estates v Aggio [2009] AC 39 applied.
(6) On the evidence, the defendant had not been a victim of a transfer at an undervalue for purposes of section 423 of the Insolvency Act 1986, so as to avoid the consequences of the relevant transactions and preclude enfranchisement. The section did not apply in the present case. In any event, the defendant had not established that the aggregate of the premiums paid by the SPVs for the grant of their underleases was significantly less than the value of what they received: Phillips v Brewin Dolphin [2001] 1 WLR 143 considered.
Nicholas Dowding QC, Richard Snowden QC, Anthony Radevsky and Andrew Thornton (instructed by Stephenson Harwood LLP) appeared for the claimant and the third party; Stephen Jourdan QC and Mark Sefton (instructed by Maples Teesdale LLP) appeared for the defendant.
Eileen O’Grady, barrister
