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Stuck in the middle – lease extension of flats and the rights of an intermediate leaseholder

By Tornike Purcell Senior Solicitor at Bolt Burdon and Nicholas Kissen Senior Adviser at LEASE

December 2016

On 29th November 2016 in the case of Kateb v. Howard de Walden Estates Limited and Accordway Limited [2016] EWCA Civ 1176 the Court of Appeal made clear how limited is the ability of a headlessee to challenge the price for a lease extension of a flat where it is agreed between the freeholder and the flatowner.

Background law

A leaseholder of a flat is entitled to extend the term of their lease by an extra ninety years, so long as they have been the owner for at least two years. This right is provided by the Leasehold Reform, Housing and Urban Development Act 1993, as amended by the Commonhold and Leasehold Reform Act 2002. A price is to be paid for obtaining the extension. The process starts with the service of a formal initial notice upon the landlord setting out certain information including the price proposed to be paid for the lease extension.

The price and any other disputed terms of the new lease are determined by a tribunal if they cannot be agreed between the parties. In England the appropriate Tribunal is the First-tier Tribunal (Property Chamber) and in Wales it is the Leasehold Valuation Tribunal.

Intermediate leases

The most common relationship in flat ownership is that of leaseholder and freeholder. Sometimes additional complexity is introduced when a lease exists between the freeholder and the flat owner, known as an ‘intermediate leasehold interest’ (“headlease”). In that situation, the flatowner has what is known as an ‘underlease’.  As a result, the owner of the headlease is the ‘immediate landlord’ of the flatowner. Accordingly one has to identify the party upon whom the initial notice is to be served and who can ultimately deal with the grant of the lease extension. That party is called “the competent landlord”

The competent landlord is the first landlord above the underlease who is capable of granting the 90 year extension. Often the competent landlord will be the flatowner’s immediate landlord, but there are circumstances where they do not have sufficient years on their own headlease to grant the underleaseholder the additional 90 years.

For example, if an underlease is 75 years, then the immediate landlord must have at least 165 years headlease to be the competent landlord. If the immediate landlord is not able to grant the additional 90 years to the flatowner then it would usually, but not always, be the freeholder who would be capable of granting the additional 90 years to them. As the competent landlord, the freeholder would conduct the lease extension claim on behalf of the other intermediate landlord(s). Separate prices will need to be proposed in the notice of claim in respect of the effect of the extension on the freehold and headlease.

The intermediate landlord can seek to conduct their own affairs, if their ownership or the premium is in question, by serving a notice of separate representation; but as this Court of Appeal decision demonstrates the headlessee has limited powers and remains vulnerable in certain circumstances.

Facts and issues before the Court of Appeal

The parties involved in this case were

  1. Accordway Limited (AY), the owner of a flat on an underlease contained in a building in Harley Street, London;
  2. Stella Kateb (“SK”) the headlessee (and ‘immediate landlord’) under a long headlease of the flat;
  3. Howard de Walden Estates Limited (HdW) the freeholder and the ‘competent landlord’.

Ms Ingram served a notice of claim on HdW to extend the lease under the 1993 Act and the benefit was later assigned to AY. SK, as the headlessee, served a notice of separate representation. SK and her representatives may have naturally assumed that serving the notice of separate representation would ensure that she was kept informed by HdW in regards to negotiating a premium and the lease terms. However, as it later transpired, AY proposed a total premium of £269,000, with £265,600 apportioned to HdW and £3,400 to SK. Without consulting SK, the competent landlord accepted the leaseholder’s offer.

The issue before the Court of Appeal to decide was whether SK was bound by an agreement reached between HdW and AY in respect of the amount payable to SK.

Decision on appeal

The Court of Appeal held that a notice of separate representation by SK did not undermine the HdW’s authority to reach enforceable agreements with AY, and subsequently bind SK as the intermediate landlord. HdW was required to act in good faith and take reasonable care having regard of all interests they represented (including SK’s). Any lack of good faith or negligent conduct on the part of the competent landlord would run the risk of liability in damages.

If SK was concerned with HdW’s conduct of the claim then she could seek directions from the County Court as to how HdW could deal with the proceedings, and in respect of any agreement on the price recover compensation for negligence and bad faith. For example, SK could seek a direction that HdW is directed not to reach any agreement without her prior consent.

SK’s representatives also argued that such limitation of her involvement with the claim would infringe their client’s right to a fair hearing under the Human Rights Act 1998. The Court of Appeal disagreed, concluding that the policy of allowing the amount of compensation for the headlessee to be determined by the competent landlord or the tribunal was not disproportionate or in breach of her human right to a fair hearing.

Take aways from this decision

  1. Separate legal representation will not guarantee the headlessee influencing the premium payable;
  2. If the headlessee has no confidence in the competent landlord’s conduct of the proceedings they must make an application to the County Court before the premium and the terms are agreed;
  3. The competent landlord should be advised from the outset to agree the terms and the premium with all the parties involved to reduce the prospects of litigation for loss on the basis of bad faith or negligence.

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