Legal Landscape is Complex When Tenants Seek to Buy Freehold of Flats

Flat tenants in certain circumstances have the right to band together and acquire the freehold of the blocks in which they live. However, as a High Court decision showed, the process of doing so is replete with legal pitfalls and those who fail to take professional advice are likely to have their ownership ambitions thwarted.

The case concerned a block of 42 flats which were held on long leases. A majority of the tenants served notice on their landlords under the Leasehold Reform, Housing and Urban Development Act 1993 requiring the transfer of the block's freehold to them. The landlords – two members of the same family – admitted the tenants' claim to the freehold but disputed the proposed terms of acquisition. After an impasse was reached, the tenants launched proceedings through their corporate vehicle.

Unbeknown to the tenants, the landlords had previously granted to one or other of themselves 14 leases of various portions of the internal and external parts of the block, including airspace and subsoil. The 20-year leases were granted without payment of premiums and rents were set at a peppercorn. They conferred rights to build on the premises demised and incorporated options for 99-year leases on completed structures.

The leases had not been registered prior to the tenants giving notice to acquire the freehold and the tenants were thus unaware of their existence at the time. The tenants had not subsequently applied to amend the notice so as to include acquisition of the leases. They argued, however, that the landlords were obliged to transfer the leases to them. That was on the basis that the landlords had failed in their obligation under Section 5 of the Landlord and Tenant Act 1987 to give notice to all qualifying tenants prior to the leases being granted.

In refusing to order the landlords to transfer the leases to the tenants, however, the Court noted that disposals of land by way of gift to a member of a landlord's family are, by virtue of Section 4(2) of the 1987 Act, exempt from the requirement to give such notice. Each of the leases had been transacted between the landlords, they being members of each other's family. Nothing of value having been provided in exchange for their grant, the leases were properly viewed as gifts. In those circumstances, the exemption applied.