Pulling apart airspace development leases and landlord's carve-outs

The recent case of LM Homes Limited and Others v Queen Court Freehold Company Limited (2020) has helped to clarify whether Leases put in place by a Landlord – often to associated companies set up by the Landlord - of common parts of a primarily residential building, including airspace above it and cellars below it, may be ineffective.

Landlords try to maximise their investment in a residential block of flats by granting Development Leases. These are then sold on to Developers who obtain Planning Consent to add new flats in the building.

In the case of LM Homes Limited the Landlord had granted Leases of the airspace, the boiler room and subsoil to associated companies (which avoided the effects of the Landlord & Tenant Act 1987 so Notices did not have to be served on the Tenants in the building confirming that the tenants had a right of first refusal  in relation to the same).  
The associated companies then sold the Leases to Developers for a significant return.

Such Leases need to be very well drafted in order to allow the Developer to, for example, elevate the building, remove the existing roof, extend the lift shaft, replace the lift, connect to and extend services to serve the new floors and to enjoy rights of support from the rest of the building – and to avoid claims from the existing tenants in the building notwithstanding the considerable noise, dust, disruption and inconvenience caused by the proposed development.

Rather than attempt to make a claim for nuisance or some other breach of their leases, the tenants in the LM Homes case applied a different strategy.

They instead served a notice under the Leasehold Reform Housing & Urban Development Act 1993 (“the 1993 Act”) to exercise their right of collective enfranchisement to acquire the freehold of the building which of course includes the Common Parts, and which, if successful would deprive the developer of its ability to undertake the proposed airspace development.

The 1993 Act defines “Common Parts” as including the structure and exterior of the Building and any common facilities within it.

In the LM Homes case, the Tenants were able to persuade the Court that the airspace above the roof, a boiler room in the basement and subsoil areas were “Common Parts” for the purposes of the Act. The Court decided that the three separate areas were used as part of the Common Parts of the Building on a “functional test” and that it did not matter that those areas were held under a separate title number.

What mattered was how these areas were being used so obviously the Common Parts of the Building must, for example, include the room in which the communal boiler was housed.  The Court also found that the areas of airspace and the subsoil were also necessary in order to repair and maintain and manage the building, and therefore these areas could be acquired by the tenant collective.

Some have argued that Lord Justice Lewison, did not clarify how the airspace above a building and the subsoil below it could comprise “Common Parts” but on his analysis surely it is not possible to manage a Building (including the roof) unless you have the right to go on to the roof in order to repair and maintain it, meaning that the roof and airspace above it must amount to Common Areas and be subject to successful collective enfranchisement claims by the existing tenants and therefore potentially sterilise development of the roof and airspace.

However, it is not all bad news for landlords, because if the tenants are collectively enfranchising the entire building, which has the potential for further development, then this should be factored into the acquisition cost that the tenants have to pay for the freehold.

It is proposed by the Government that new permitted development rights be granted later this year which will allow buildings to be extended upwards in any attempt to ease the housing crisis but it is clear that Developers and Landlords will need to be careful.

The LM Homes case does not frustrate roof space developments but it may mean obtaining cooperation from existing residential tenants in the building and require the Landlord to consider all avenues such as service of Notices of right of first refusal under the Landlord & Tenant Act 1987 rather than trying to circumvent these rights.