A very recent decision of the Court of Appeal (Avon v Canary Gateway (Block A) RTM [2023] EWCA Civ 616 (30 May 2023) has thrown up some potentially quite far ranging implications for housing associations.
The appeal | Shared ownership leases
The appeal dealt with the single issue of whether shared ownership leases where a tenant had a less than 100% share were long leases and so met the qualifying criteria for right to manage for purposes of section 76(2) of the Commonhold and Leasehold Reform Act 2002. The Upper Tribunal had previously held that they were long leases and the Court of Appeal case was therefore the landlord’s appeal from the decision of the UT.
Section 76(2) contains various qualifying criteria for a long lease, including where:
“(a) it is granted for a term of years certain exceeding 21 years, whether or not it is (or may become) terminable before the end of that term by notice given by or to the tenant, by re-entry or forfeiture or otherwise …
(e) … It is a shared ownership lease … where the tenant’s total share is 100% …”
The question the Court of Appeal was asked to decide was whether section 76(2)(e) qualified section 76(2)(a) so that a shared ownership lease granted for more than 21 years is not a long lease where the tenant’s share is not 100%.
Outcome
The Court of Appeal’s answer to this question was simple – no, it did not. It found that section 76(2) was to be read as a series of qualifying gateways and if tenants could pass through any of those gateways, their lease was a long lease for the purposes of qualification for the right to manage.
The decision throws up some fairly wide-ranging implications for housing associations in respect of their shared ownership blocks and developments, given that virtually all shared ownership leases are granted for more than 21 years. There is bound to be an appetite among some shared owners to take control of the management of their blocks and it is likely there will be a number of applications on the back of the decision. The Court of Appeal did not find this a problem: Lord Justice Newey noted in his judgment that shared ownership tenants who had not staircased 100% would have an “obvious interest” in how their block is managed because they typically pay full service charges, so Parliament may well have intended them to be able to participate in the right to manage.
There are wider implications of the decision in relation to lease extension and collective enfranchisement because the wording of section 7(1) of the Leasehold Reform, Housing and Urban Development) Act 1993 is drafted in almost identical terms to section 76(2) of the Commonhold and Leasehold Reform Act 2002. Accordingly, the natural progression of the decision of the Court of Appeal is that shared ownership tenants who have a less than 100% share in their lease would also be qualifying tenants for the purpose of statutory lease extensions and collective enfranchisement. While section 5(2)(b) of 1993 Act provides an exemption for housing accommodation provided by a charitable housing trust in pursuit of its charitable purposes, this not avail all housing associations in all situations.
If the carve out provided by section 5(2) is not available, shared ownership tenants will qualify for lease extension and collective enfranchisement. As it has never really previously been considered that shared ownership leases do qualify for enfranchisement where the tenant’s share is less than 100%, this produces some novel valuation issues.
In the context of collective enfranchisement, the enfranchising group would have to buy out the shared owner’s unacquired share of the lease, which would make collective enfranchisement expensive.
In the case of lease extension, the rent becomes a peppercorn which means valuing the landlord’s share of the rent on the share of the property it owns. Again, this means that statutory lease extension is going to be expensive. Whether it is more expensive for the tenant than staircasing to 100% and then extending the lease is a matter of valuation.
Summary
The Court of Appeal’s decision settles the issue in relation to right to manage, in the absence of a further appeal to the Supreme Court, meaning that shared ownership tenants who have not staircased to 100% ownership are, assuming all the other criteria are met, qualifying tenants for the purpose of right to manage under the Commonhold and Leasehold Reform Act 2002 (which we understand may be in the offing).
If you have any further enquiries regarding Ownership leases, please feel free to contact our Real estate team.