Can a freeholder build upwards on an existing block?

In the residential sector there are development opportunities available in building additional flats on top of existing blocks. Long leaseholders in existing flats often object strongly to such new developments if they do not own a share of the freehold and will not benefit from the profits of the development.

Vectis Property Co Ltd v Cambrai Court Management Co Ltd [2022] UKUT 42 (LC) was such a case involving an argument over the price the long lessees of a block would have to pay to acquire the freehold, with planning permission, as they sought to enfranchise. The question for the Upper Tribunal was whether or not the price should reflect the freeholder’s ability to build two new flats on top of the block.

The lessees ran various arguments, but one worth noting was whether the freeholder had that right to develop as that right hadn’t been expressly reserved in the leases of the existing flats. The Upper Tribunal confirmed that so long as the structure of the roof of the block and the airspace above were not demised to the lessees then those areas were the freeholder’s property and it could build there if it wished. If construction works caused a nuisance or infringed the existing lessees’ other rights, that was a different matter and they had other remedies.

The background

Cambrai Court (the Property) comprised nine flats, with garden and parking space, let by Vectis to nine lessees under long leases. One of the conditions of the lease was that the lessees became shareholders in the company, Cambrai Court Management Co Ltd, which assumed responsibility for the exterior repair of the Property, while the lessees were responsible for the interior repair.

In 2018, a third party secured planning permission to build two further flats on top of the Property, and tendered an offer to purchase the freehold. The respondent exercised their rights of first refusal in April 2019 and in June 2019, served notice claiming the right to enfranchise the building.

Vectis admitted that right and only the price had to be determined by the FTT. Indeed, only one element of that price was in dispute. The parties agreed that the price payable by the respondent for the freehold would be £24,500, together with whatever sum was payable for the development ‘hope value’ in relation to the roof space; the appellant claimed that that hope value was worth a further £203,300 while the respondent said that it had no value.

The FTT found that the terms of the leases meant that the landlord did not have the right to build two new flats on the roof. It held that nevertheless a purchaser might pay a further £25,000 for hope value, making a total of £49,500, because it was possible that development could be achieved through negotiation. It also found that if it was wrong about the appellant landlord’s right to develop, and the leases did not preclude the freeholder from building two new flats on the roof, then the development value to be added to the purchase price was £166,725 making a total of £191,225. In reaching this decision, the FTT defined the roof narrowly as the roof as it existed when the building was constructed in 1969, and not as the roof might be from time to time. Such an interpretation would mean that if the roof was replaced in a different form, for example a pitched roof instead of a flat one, such an alteration would not be part of the Property and the respondent would therefore have no obligation to repair it. The Upper Tribunal found such an argument “extremely far-fetched”.

Further the Upper Tribunal dismissed the company’s other arguments, one of which was that a landlord would have no right to commence works on the Property, as that this would impinge on the company’s obligation to repair the roof.

The appeal

The Upper Tribunal accordingly found for the applicant, reversing the decision of the FTT. The narrow interpretation of the roof was disregarded; instead it was held that a covenant to repair a roof will be read as the roof from time to time existing at the vertical limit of a property. It was further held that Vectis was not required to expressly reserve the right to develop the roof so long as the lease in its entirety foresaw the possibility of development of any part.

The Upper Tribunal rejected the arguments of the company that the landlord would not be permitted to effect works on the Property by dint of these impinging on the health and safety obligations of the landlord, and the repair obligations of the tenant. It was found that there was a risk that development might hinder the performance of these obligations, but that mere risk would not be sufficient to defeat a planning proposal. It is for the landlord to ensure that any works were compliant with existing obligations. The courts will not hinder development where there is a possibility that this might be carried out correctly.

Finally, the Upper Tribunal considered the effect of the lettings scheme on the appeal. On this count, it was found that the terms of a lettings scheme should be preserved across iterations insofar as they relate to the bounds of the estate and any positive or negative covenants imposed on any party; there will be no bar on subsequent agreements adding additional units to the lettings scheme. Furthermore, the Upper Tribunal indicated that it would consider injunctive relief for the appellant if the company refused to sign any subsequent lease, and by this means break the lettings scheme.

Practical considerations

This ruling has interesting implications for the future consideration given for property enfranchisement. Given that current government policy indicates a preference to convert residential leaseholds to freeholds where possible, it is likely that consideration will become an ever more contentious issue.

The decision here demonstrates that the courts will look favourably on landlords who are compelled to relinquish their interest, and so lose out on developmental benefits. In particular, it appears that the courts will take a dim view of lessees raising spurious arguments against development rights, where the sole purpose appears to be depreciating the value of land. It is highly illuminating that the Upper Tribunal stated its willingness to compel the company to sign a future lease, rather than let a lack of signature impede Victus’ access to proper recompense.

Finally, the decision illustrates the courts’ openness to define lease provisions broadly where they relate to improvements to a property. Contractual syntax and drafting style will not be sufficient to defeat proposed works to a property so long as there is no more compelling reason why such works should not go ahead. It appears that the courts will look more closely at the spirit of a contract, looking for terms to be implied, when questions of authority to commence works arise. When drafting lease agreements, it will therefore be prudent to reserve any specific rights that the lessor hopes to retain, and to properly clarify the bounds of each parties’ authority, should you wish to prevent unwanted alterations.

How can Birketts help?

Birketts have a specialist Housing Management Team and Development Team to assist our clients stay one step ahead. Our expert lawyers can advise on all aspects of housing and asset management from building safety issues, defending disrepair claims/EPA prosecutions, subletting/housing fraud cases, service charge disputes, s.20 consultation issues, applications to vary defective leases, to name but a few of the issues we can assist with. Our experts have decades of experience acting for Registered Providers and local authorities and offer a truly ‘one-stop shop’ for the issues facing the sector. We have a dedicated team to deal with Right to Manage and enfranchisement issues.

If you have any queries regarding the content of this article or wish to discuss any issue regarding the management of your tenants or stock, please contact Clive Adams, Jonathan Hulley or any member of the Social Housing Team, to see how Birketts can help you.