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Tenants of commercial buildings 'may forcibly acquire the freehold interest in certain circumstances'

Tue 01 Jul 2014

A legal ruling could pave the way for occupants of commercial buildings to acquire the freehold interest against the will of the landlord.

In the case of Mount Eden Land vs Bolsover Investments, the landlord of an office building on a 999-year lease from 1913 was appealing against an earlier decision that it was not reasonable for it to withhold consent to plans to turn it into 16 or 17 residential flats.

The court, in making its decision rejected the landlord’s argument that it was reasonable to refuse consent on the grounds that its freehold interest in the building would otherwise become prone to compulsory purchase by flat owners acting collectively. On the facts the court  judged the possibility of future enfranchisement to be entirely speculative and therefore did not accept that this represented a good reason for rejecting the plans.

This ruling could potentially have an impact on future cases, with tenants of commercial buildings being able to forcibly acquire the freehold interest in certain circumstances.

Mark Vinall, a partner at Winckworth Sherwood Solicitors specialising in enfranchisement and leasehold property matters, commented: "Tenants seeking to develop their building in this way face hurdles in the form of restrictions contained in their lease that they must surmount if they are to be able to proceed with their project. Commonly the relevant restrictions will relate to the use to which the building can be put and the alterations that can be made. 

"Some leases contain absolute bars against changing use or making alterations. Others permit certain dealings and alterations subject to obtaining the landlord’s consent. The former enables the landlord to prevent such a development by refusing consent without fear of its refusal being challenged. The later, known as a conditional restriction, bears this risk of the tenant challenging the reasonableness of decision to refuse consent. There may be other relevant lease provisions.

"In this case the tenant held a lease of an office building and proposed converting it into 16 or 17 flats. The lease did not prohibit the tenant changing the use to residential but did contain a covenant restricting alterations. Unfortunately for the landlord the alterations restriction was of the softer conditional form so while it required the tenant to apply to the landlord for consent the landlord was not entitled to withhold that consent unreasonably.

"The landlord based its refusal to consent to the alterations on a number of grounds including the possibility that a change of use to residential might confer rights of enfranchisement which could deprive the landlord of its reversionary interest in the building.

"The judge at first instance held that none of the grounds relied on was a reasonable ground for withholding consent; the potential enfranchisement of the landlord’s interest, while a reasonable consideration to take into account, was found to be wholly speculative.

"Not surprisingly the landlord sought permission to appeal on the enfranchisement point. 

"The court found against the landlord on the basis that its task was to determine whether the landlord’s decision was within the band of possible decisions a reasonable landlord could make and that the judge at first instance was entitled to find that the possibility of enfranchisement, while a relevant factor, was wholly speculative on the facts.

"The facts were that the tenant had not yet decided whether the flats were to be let on long leases, that even if they were the lessees might not exercise the right to enfranchise and if they did the length of the lease (899 years remaining) meant that the financial detriment was not significant. That left the landlord’s concern as to loss of control of the building which was part of a larger estate. This was weighed against the other factors and found not sufficient to make it reasonable to withhold consent.

"So those holding or looking to buy reversions to buildings currently put to non residential use need to be aware of the risk that they might be disenfranchised via this route. Where an application relating to a proposed residential development is received the reversioner will need to carefully review the lease restrictions and, where they don’t have the tenant over a barrel by way of an absolute bar to changing use or altering, they will have to carefully examine the reasonableness of potential grounds for refusing consent i.e. hope to find strong evidence of intended enfranchisement or be able to demonstrate significant financial detriment.

"Those who have followed the Dolphin Square enfranchisement case (Westbrook Dolphin Square Ltd v Friends Life Ltd) may look askance at the court’s comment in this case that the possibility of enfranchisement was wholly speculative on the facts."

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