Can leaseholders of a house acquire the freehold despite their ownership not including the roof and foundations?

At first instance before the County Court the leaseholders of the houses were successful; the landlord’s argument that a material part of the house lay above the area let to the leaseholder was rejected (s2(2)).

On appeal the question examined was whether they were “Tenants of a leasehold house” within the meaning of s.1(1). The landlord’s argument that they had to be a tenant of substantially the whole of a leasehold house, was upheld viewing that phrase in its full statutory context. Otherwise for example a flying freehold interest would be created.

It took into account the risk of avoidance of the Act, noting that there would be occasions on which the landlord had legitimate reasons for excluding part of the “house” from the demise, that in some cases the legislation could be interpreted to block evasion and that buyers of leasehold houses could reflect the lack of entitlement to enfranchise in their bid or turn away from such properties.

It also found that a leaseholder in this situation could not get round their lack of entitlement via the anti-avoidance provisions contained in s.23(1) and even if that were wrong and s.23(1) did apply, it could not be used to enable them to qualify for enfranchisement as it would void offending provisions rather than permitting the court to amend the lease terms to demise substantially the whole the leasehold house and so qualify.

In conclusion buyers of leasehold houses need to carefully examine the lease terms to see whether they will be able to acquire the freehold in time.

The briefing:

FREEHOLD PROPERTIES 250 LTD v BEVERLEY ANN FIELD & 18 ORS (2020) [2020] EWHC 792 (Ch) Ch D (Marcus Smith J) 08/04/2020 LANDLORD AND TENANT ENFRANCHISEMENT : FREEHOLDS : LONG LEASES : STATUTORY INTERPRETATION : TENANTS The tenants of an end-of-terrace house, demised under a long lease that excluded certain structural parts, including the roof and the foundations, had no right to acquire the freehold title as they were not "a tenant of a leasehold house" under the Leasehold Reform Act 1967 s.1(1). The phrase "a tenant of a leasehold house" should be read as "a tenant of substantially the whole of a leasehold house"; accordingly, the tenants could not qualify under s.1(1) where the demise did not extend to the roof or the foundations. The appellant freeholder appealed against a decision of the County Court that 11 of its properties, or the leases of those properties, fell within the scope of the enfranchisement regime under the Leasehold Reform Act 1967. The respondents were the long leasehold owners of the properties which were terraced or semi-detached houses situated on an estate. They sought declarations as to whether they were entitled to enfranchise under Part I of the Act. The properties were materially identical for the purposes of the points under consideration and therefore only Number 126, leased by the seventh and eighth respondents, was considered by the recorder for the purposes of his decision. Number 126 was an end-of-terrace house, demised by a lease for a term of 99 years from April 1990. The terms of the lease excluded certain structural parts of the property such as load bearing walls, the foundations and the roof. The appellant contended that the respondents had no right to acquire the freeholds, arguing that Number 126 fell outside the scope of s.2(2) of the Act. The recorder held that the properties fell within the scope of the Act and that the respondents were entitled to acquire the freehold title. HELD: New point of law - The respondents argued that the appellant's grounds of appeal relied on s.1(1), which had not been argued before the recorder, and that the permission to appeal did not give permission in relation to that new point. However, the appellant was simply re-framing the legal issues and not seeking to introduce new evidence. Moreover, it was permitted to pursue a different line of argument as the new point was open to it on the pleadings. Sufficiently wide permission to appeal had been given and the respondents were not taken by surprise as the grounds for appeal dated from August 2019 (see paras 11-12 of judgment). "Tenants of a leasehold house" - The question was whether the seventh and eighth respondents were "a tenant of a leasehold house" within the meaning of s.1(1). The construction favoured by the appellant, that a tenant did not fall within the enfranchisement regime of the Act unless they were the tenant of substantially the whole of a leasehold house, was correct. The phrase "a tenant of a leasehold house" was ambiguous, until viewed in its full statutory context. The only term in the phrase to receive a statutory definition was the term "house" in s.2. That term was carefully crafted and sought to isolate and define within a single building what may or may not be multiple houses. The distinction between a single building and multiple houses within that building was articulated by reference to its physical characteristics rather than the legal interests in the property. As the Act had defined the "house" to be enfranchised, it would have been curious if, without further statutory articulation, some legal interest less than an interest in substantially the whole of the leasehold sufficed to qualify for enfranchisement. That approach was supported by the following matters: The text-books Radedevsky and Greenish, Hague on Leasehold Enfranchisement 6th ed and Harrison and Lonsdale, Leasehold Enfranchisement: Law & Practice 1st ed and such authority as there was took the same approach, Baron v Phillips (1979) 38 P. & C.R. 91, [1978] 4 WLUK 138 considered.The consequence of the respondents' contention, that the extent of the demise under the lease made no difference, was that a leaseholder of a material part of a leasehold house, but not substantially the whole of it, was entitled to be enfranchised. Parliament's intended outcome was to enfranchise leaseholders so as to enable a lease to be turned into a freehold. Parliament would have regarded the expansion of a demise so that a lease of part of a house was converted to the freehold of the the whole of it as a surprising outcome. The respondents' contention that enfranchisement could be limited to the extent of the demise was rejected as that would create flying freeholds, which was not something Parliament could have intended without clearer wording, and the statutory obligation to convey under s.8 was of the "house" and not of that part of the house that was demised.There would be cases where a landlord had quite deliberately reserved part of a "house", and physically limited the extent of the tenant's demise. Whilst that gave rise to a risk of avoidance of the Act, there were instances where the landlord had legitimate reasons for reserving part of the "house" which the respondents' construction overrode. There was still a risk of avoidance whereby a landlord could avoid enfranchisement under the Act by reserving a "strata" of what would otherwise be a "house". However, the more egregious forms of evasion could be prevented by reading the phrase as meaning "a tenant of substantially the whole of a leasehold house". Moreover, a prospective purchaser of a tenancy, that would otherwise qualify for enfranchisement, would hesitate before investing significant sums on a leasehold estate, the demise of which was artificially constrained (paras 44-47, 62-63). Avoidance provisions - The provisions of the lease did not fall within the ambit of the anti-avoidance provisions in s.23(1) as it was not wide enough to embrace a limitation on a tenant's demise. Even if s.23(1) did apply, it could not serve to expand the respondents' rights to enable them to qualify for enfranchisement. Section 23(1) caused provisions within its scope to be voided. It did not permit the court to re-write the terms of the lease so that the rights of the seventh and eighth respondents could be expanded to render them tenants of substantially the whole of the leasehold house (paras 64-66). Appeal allowed Counsel: For the appellant: Jonathan Upton For the respondents: Ewan Paton, Jay Jagasia Solicitors: For the appellant: Stevensons Solicitors For the respondents: Barcan & Kirby LLP LTL 15/4/2020 : [2020] 4 WLUK 142 Judgment: Official - 25 pages Document No.: AC5011053