Case Update: Receivers Unable to Claim Freehold

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The Keepers and Governors of the Possessions, Revenues and Goods of the Free Grammar School of John Lyon v Sacha Warren George Helman [2014] EWCA Civ 17

Background

The Leasehold Reform Act 1967 gives a tenant a right to acquire on fair terms the freehold in circumstances in which the tenancy is a ‘long tenancy’ and other conditions are satisfied, including by s1(1)(b) that at the time when the tenant gives notice in accordance with the Act of his desire to have the freehold he has been a tenant for the last two years.  The Court of Appeal considered the validity of a notice claiming to exercise such right, in respect of a house pursuant to Part 1 of the Leasehold Reform Act 1967.

The Landlords granted a 99 year lease (Lease) of a house (Property), which was assigned to Peter James (Tenant) in October 2002. The Tenant charged the Property to a lender, which granted a sub-charge under which the sub-chargee could appoint receivers with wide powers to give notices in the Tenant’s name.

The Tenant was adjudicated bankrupt on 29 October 2009 and a trustee in bankruptcy appointed on 28 January 2010 (Trustee). The sub-chargee appointed receivers on 19 October 2010 (Receivers), following which the Trustee disclaimed the Lease on 23 February 2011.

The Receivers served a notice on the Landlords in the bankrupt Tenant’s name claiming the freehold under the 1967 Act (Notice). The Lease had been sold and the benefit of the Notice assigned by the receivers to Mr Helman.

The Landlords challenged the Notice on the following grounds:

  1. upon the Tenant’s bankruptcy the Lease vested in the Trustee;
  2. as a result, at the date of the Notice, the Tenant had not been the tenant “for the last two years” and that meant that the condition for enfranchisement prescribed by section 1(1)(b) of the 1967 Act was not satisfied; and
  3. in the alternative, the giving of the Notice was precluded by the disclaimer.

The Landlords’ challenge was dismissed by HHJ Taylor in the Central London County Court and the Notice was held to be valid.

Appeal

The Landlords appealed and the Court of Appeal held that the Tenant was not able to claim the freehold under the 1967 Act.

S306(1) of the Insolvency Act 1986 (Insolvency Act) provides that the bankrupt’s estate vests in the trustee immediately on his appointment taking effect, which in this case was 28 January 2010.  S306(2) of the Insolvency Act provides for the vesting to take effect without any conveyance, assignment or transfer. S283 of the Insolvency Act provides that a bankrupt’s estate comprises all property belonging to or vested in the bankrupt at the commencement of his bankruptcy.

Immediately before he was declared bankrupt, the Tenant had been the tenant for seven years and satisfied the requirements of the 1967 Act to be entitled to give notice to claim the freehold. Following bankruptcy of the Tenant, and prior to the Notice being given to the Landlords, the Lease vested in the Trustee. Accordingly, the condition of the Tenant being required to be the tenant for the last two years was not satisfied, and the Receivers were not entitled to claim the freehold of Property. The appeal was allowed.

The Court of Appeal did not consider it necessary to consider the alternative submission that the disclaimer of the Lease by the Trustee precluded the giving of the Notice on the basis that the 2 year requirement has not been satisfied.

Comment

By operation of law, the Lease vested in the Trustee and the Tenant could not be said to have been the tenant for the previous two years prior to the Notice being given. As the Tenant did not satisfy the conditions to claim the freehold of the Property, the Receivers could not claim the freehold of the Property.

For more information, help or advice please contact Imran Malik on 0191 211 7880.