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Rack rent, enfranchisement and intermediate leasehold interests

By J

McHale v Earl Cadogan [2010] EWCA Civ 14 is, it’s safe to say, probably not going to be one of the most discussed cases on NL this year, but we are nothing if not comprehensive and couldn’t fail to write it up.

Collective enfranchisement is the process whereby qualifying tenants of flats of buildings can force their freeholder to sell the freehold to their nominee purchaser (often, but not always, a company established by the leaseholders for this purpose). The relevant statutory provisions are found in Chapter 1, Leasehold Reform, Housing and Urban Development Act 1993. If the parties cannot agree the price to be paid for the purchase of the freehold, Sch. 6, 1993 Act sets out the basis upon which the LVT can determine the same. One of the factors that may have to be considered is whether there is any intermediate leasehold interest and if so, the value of that interest, which will also have to be bought out by the tenants.

In the present case, the appellant was the intermediate leaseholder of a building. He had granted long underleases of five of the six flats in the building and retained the sixth as a caretaker’s flat. The respondent was the freeholder of the building.

The appellant and two of the underleasees attempted to exercise the right to collectively enfranchise. One of the issues that arose for determination was the value of the intermediate leasehold interest and, in particular, whether or not the appellant was entitled to be compensated for the loss of a sum equal to the rack rent which he could recover for the caretakers flat. The LVT and the Lands Tribunal had determined that the appellant had no right to such a sum and hence it did not fall to be included when calculating the value of the intermediate leasehold interest.

The Court of Appeal allowed the appeal. The terms of the headlease between the appellant and respondent obliged the appellant to use his best endeavours to provide a caretaker, who should reside in the caretakers flat on a rent-free basis. However, the underleases obliged the tenants to contribute towards the cost of employing a housekeeper, including the loss of rack rent on any accomodation provided.

The respondent contended that, as the headlease required the caretakers flat to be provided on a rent-free basis, there could be no loss of a rack rent. The Court of Appeal disagreed. The underleases expressly obliged the tenants to pay (via their service charges) in respect of the loss of rack rent. The fact that the flat had to be provided to the caretaker free of charge did not alter the fact that there was a loss of the rack rent. The only person who could not be charged for the caretakers flat was the caretaker.

There was nothing in the point that the headlease referred to the caretaker whilst the underleases only referred to a housekeeper and, although this point had previously appealed to the Land Tribunal, the respondent was right not to rely on it.

The appeal also raised another issue, namely whether the intermediate leasehold interest should be valued using the same assumptions as the freehold interest (i.e. that this was a “no Act world”) with no statutory right to enfranchise. That matter is (a) of general public importance and (b) likely to give rise to a much longer judgment than this one. It was adjourned off to a future date.

J is a barrister. He considers housing law to be the single greatest kind of law known to humankind and finds it very odd that so few people share this view.


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