Qualifying tenants and the Leasehold Reform Act
If there is a lease of four flats, flats 1 to 4, and there are two assignments of part of the demised premises held under the lease, one to A of flats 1 and 2, and another to B of the remaining two flats, flats 3 and 4, then for the purposes of section 5 of the Leasehold Reform Housing and Urban Development Act 1993;
Is A the tenant of his two flats and B the tenant of his two flats, or are A and B together to be regarded as tenants of all four flats?
If the first alternative is correct then A and B are qualifying tenants for the purposes of the 1993 Act. If the second alternatove is correct then they are not. That was the question for the Court of Appeal in Smith & Anr v Jafton Properties Ltd  EWCA Civ 1251. Link to judgment here.
Jafton Properties Ltd is registered at HM Land Registry as the sole proprietor of the freehold interest in Newbury House, 10-13 Newbury Street, London EC1. The freehold of 10-12 Newbury Street is registered under title number 314961 and the freehold of 13 Newbury Street is registered under title number 314960. The property is a self-contained building, which now consists of 4 flats, one on each floor, with a lower ground floor storage area and certain common parts. On 26 January 1926 the then freeholder granted a lease of the property as a whole for a term of 99 years from 24 June 1924 at an annual rent of £85 payable quarterly in advance on the usual quarter days. The lease was registered at HM Land Registry. The lease contains a number of relatively usual covenants but there are no express covenants against assignment or underletting.
In October 2004 Mr Smith and Mr Dennis bought the lease at auction and it was assigned to a company called City Apartments Ltd. Messrs Smith and Dennis own 75% of City’s shares and have at all material times been its only directors. When City acquired the lease the property was in a dilapidated condition; but City carried out substantial works of refurbishment and created four separate flats, numbered 1 to 4. Following completion of the works, and creation of the four flats, City executed three transfers of separate parts of the property purporting to assign the property comprised in the lease in three parts by three separate instruments as follows:
i) a transfer of flats 1 and 2, with lower ground floor storage space, to Mr Smith alone;
ii) a transfer of flats 3 and 4, also with lower ground floor storage space, to Mr Dennis alone; and
iii) a transfer of the remainder of the Property (essentially its common parts) to Messrs Smith and Dennis jointly.
The transfers purported to apportion, without the consent of the landlord, the yearly rent payable under the lease as to £34 in respect of the premises transferred to Mr Smith, £34 in respect of the premises transferred to Mr Dennis, and £17 in respect of the premises transferred to Messrs Smith and Dennis jointly.
It is common ground that (a) the landlord was not consulted about the assignment of parts of the lease, (b) it did not consent to the assignments, and (c) it has refused to accept rent from the assignees separately since the transfers came to its attention. On 15 September 2008 the claimants were registered at HM Land Registry as proprietors of the leasehold interests, which had been transferred to them. On 17 July 2009 Messrs Smith and Dennis served an initial notice under section 13 of the 1993 Act claiming the right of collective enfranchisement of the whole of the property pursuant to Part I of Chapter 1 of the 1993 Act; and naming themselves jointly as the nominee purchaser for the purposes of the intended acquisition. By a counter-notice dated 11 September 2009 Jafton did not admit that Messrs Smith and Dennis had the right to acquire the freehold of the property for three reasons. The first reason was that they were not qualifying tenants for the purposes of Chapter I of the 1993 Act. It is that reason that was the subject of a preliminary issue, which HH Judge Dight decided in the landlords’ favour.
The Court of Appeal (MR, Aikens LJ and Lewison LJ) said that at common law, the case authorities established the following propositions: (a) the assignee’s liability to pay the rent and perform the obligations of the lessee depended on privity of estate alone; (b) if the assignee was the assignee of part only of the leased property, then the rent and other obligations for which he was liable were those referable to the part of the leased property assigned to him; (c) he was not liable for the rent or other obligations referable to the part of the leased property that had not been assigned to him; (d) the rationale for those propositions was that the assignee only had privity of estate as regards the part of the leased property of which he was the assignee.
He had no privity of estate as regards that part of the leased property that had not been assigned to him; (e) the landlord could enter any part of the leased land and distrain for the rent for the whole. But the remedy of distress had nothing to do with privity of estate, save to the extent that a relation of landlord and tenant had to exist. Therefore, at common law an assignment of part of the leased property by which the leased property was physically severed had the effect that the holder of each severed part had privity of estate with the landlord only in respect of that severed part. In short, he was the tenant of that severed part only. At common law A was the tenant of flats one and two only, and B was the tenant of flats three and four only.
It was nonetheless necessary to consider whether the Act mirrored the common law. The Act used “lease” and “tenancy” interchangeably. It was not therefore focusing on the written instrument by which the estate in land was created, but was concerned with the tenure, or status, of the holder of the leasehold estate. Accordingly, section 101(3) referred to a tenancy by which the tenant in question held an estate in land consisting of or including the flat. That had to mean the leasehold interest held by the assignee. For the reasons given at common law, A held the leasehold interest in flats one and two, and B held the leasehold interest in flats three and four. Section 101(4) was concerned with the position of persons jointly holding the same estate in the same land. Where the land had been physically separated and was severally held, the sub-section had no application. Therefore, there was nothing in the Act to displace the conclusion at common law. It followed that A and B were not excluded from being a qualifying tenant as the result of section 5(5),