The Court of Appeal handed down a judgment on 11 May 2023 in the case of Avon Ground Rents Limited v Canary Gateway (Block A) RTM Company Ltd (2023) EWCA Civ 616, which confirmed that owners of flats held on shared ownership leases are qualifying leaseholders for the purposes of pursuing a claim for the Right to Manage (“RTM”) their development. 

The case was purely a question of interpretation of the definition of a “long lease” under section 76(2)(a) to (f) Commonhold and Leasehold Reform Act 2002 (“the Act”), one of the qualifying criteria in a claim for the exercise of the RTM.  The issue was that some of those participating in the claim being pursued by the residents of Canary Gateway (Block A) held their properties under a shared ownership scheme and each held less than 100% ownership of their respective leases. The question then was seemingly a simple one - is a “shared ownership lease” that is granted for a term of more than 21 years a “long lease” for the purposes of the the Act regardless of whether the leaseholder’s share is 100%.?

Avon Ground Rents Limited (“Avon”) was the landlord of the development and thus, were the leaseholders’ claim for RTM successful, would lose control of the management of the development (including the ability to insure).  Avon opposed the claim for RTM by reference to the wording of sub-paragraphs (a) and (e) of section 76(2) of the Act (see the link above).

In the judgment (the link to which is above) the Court considered that a lease will be a “long lease” for the purposes of section 76(2) if any of sub-paragraphs (a) to (f) apply. That suggests that a shared ownership lease for a term of more than 21 years will be a “long lease”, whether or not the leaseholder has a 100% interest.  This means that the condition for a “long lease” in sub-paragraph (e) - which  references shared ownership leases specifically and requires the leaseholder to have ‘staircased’ to own 100% of the lease - will not be applicable. Instead, sub-paragraph (a) - the inclusion of all leases granted for a term exceeding 21 years - will suffice to enable the leaseholder to be a qualifying leaseholder and take part in a claim for RTM, even where they own less than 100% of the lease.

Further, the Court considered that there seemed to be force in the RTM Company’s argument as to the policy underlying section 76(2) insofar as leaseholders with long shared ownership leases, who have yet to ‘staircase’ to 100%, will still have an obvious interest in how the premises are managed, and more so since they will typically pay full service charges.

Accordingly, the judgement was that a leaseholder with a shared ownership lease “granted for a term of years certain exceeding 21 years” has a “long lease” within the meaning of section 76(2) of the Act, regardless of whether the leaseholder has a 100% interest.  Therefore, every shared ownership leaseholder in Canary Gateway (Block A) was a “qualifying tenant” for the purposes of section 75(2) of the Act (a “qualifying tenant” being a leaseholder under a long lease).

Potential consequences of the decision

The outcome of the above is great news for leaseholders of blocks with either exclusively shared ownership leases or those with a mixture of shared and full ownership leases, where there is a desire to seek the Right to Manage under the Act.  Landlords and RMCs may take an opposing view to that positive take on the outcome here. 

However, there are other considerations and effects of this decision in relation to the right to acquire a new/extended lease and the right to enfranchise (the right for qualifying leaseholders to collectively acquire the freehold) which may yet have been fully appreciated across the sector but which have been mooted by other commentators. These include the following points.

The definition of a “long lease” under section7(1) Leasehold Reform, Housing and Urban Development Act 1993 for the purposes of extending a lease or enfranchising is very similar to those in section 76(2) of the Act referred to above.  Accordingly, it stands to reason that this decision may open the door for applications by non 100% owning shared ownership leaseholders to seek new leases or to participate in a collective enfranchisement. 

The effect of a statutory lease extension under the 1993 Act includes the reduction of any ground rents presently payable under those leases to a peppercorn (effectively £nil) and thus adversely affects the funding of the relevant housing association provider. That said, it is clearly going to be the case that the premium price for any lease extension or enfranchisement where shared ownership leases are involved will be significantly higher than in a block without shared ownership leases, and so may therefore be prohibitive for those involved.

Conclusion

Whilst it is difficult to see on what basis the decision in this case can be appealed, Avon has historically not been afraid of running cases to the max and so it is to be seen whether the Supreme Court is asked to consider the same issue later and thus whether this decision is to be reversed.  It will also be interesting to see to what extent this decision does affect applications for lease extensions or enfranchisement in the future. 

If you or your clients are shared ownership leaseholders or are in a block with shared ownership leaseholders irrespective of the percentages owned then this case, presently at least, opens the door to the Right to Manage not previously thought to be available.

If you have any questions or would like any further information on this week’s Legal Update, please contact a member of the team on 01435 897297 or info@kdllaw.com.

Disclaimer

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