The Court of Appeal case, Avon Ground Rents Limited v Canary Gateway (Block A) RTM Company Limited (Avon), held that a shared ownership lease is a long lease within the definition in Section 76 of the Commonhold and Leasehold Reform Act 2002 (2002 Act). Whilst, to a certain degree, this issue has previously been considered in lower courts - the Avon case provides a clear and unambiguous conclusion to this long-standing issue, meaning that shared owners can participate in the right to manage.
Background and decision
The case revolved around a right to manage (RTM) claim brought by a group of leaseholders in a block of flats. Amongst other things, Avon opposed the RTM claim on the basis that several of the participating tenants were shared owners. They argued that due to the wording of Section 76 of the 2002 Act, shared ownership tenants did not hold long leases of their flats (a pre-requisite for participation in an RTM claim) until they had fully staircased and purchased 100% shares in the property. Both the First-tier Tribunal and the Upper Tribunal agreed with the RTM company and upheld their right to be included in the RTM. Avon appealed to the Court of Appeal.
The Justices considered that paragraphs (a) to (f) in Section 76 were 'gateways' and so if the lease fulfilled just one of the criteria listed, this was sufficient. Each of the requirements set out in the various paragraphs were intended to be alternatives rather than a series of criterion all of which had to be fulfilled. Because shared ownerships were 'granted for a term of years certain exceeding 21 years', as set out in Section 76(2)(a), that was sufficient.
Therefore, despite there being clear reference in the explanatory notes in the 2002 Act to the contrary, it was held that a shared ownership lease was a long lease within the meaning of Section 76 of the 2002 Act, regardless of whether staircasing to 100% had been achieved. The shared ownership tenants were able to participate in the RTM.
What does this mean for shared owners and registered providers?
Whilst the Avon case dealt specifically with an RTM, it has much wider implications. The definition in the 2002 Act is almost the same as that set out in Section 7(1) of the Leasehold Reform, Housing and Urban Development Act 1993 (1993 Act). The 1993 Act provides a statutory right to tenants of flats who hold long leases, to extend their lease for 90 years or to participate in collective enfranchisement and purchase the freehold of the building. Until now, the general position was that shared ownership leases were not long leases for the purpose of lease extension and / or collective enfranchisement under the 1993 Act. However, given the similarities in the definition in Section 76 to that in Section 7(1) of the 1993 Act, the decision in the Avon case appears to have changed this and it is now likely that a shared owners would be found to have the benefit of the 1993 Act rights.
That said, there are still many questions to be considered. There is no clear guidance in the 1993 Act as to how the premium for a lease extension should be calculated in a situation where a tenant's share is not 100% - do they pay 100% of the premium calculated under the 1993 Act or a percentage of that premium based on the share they hold? Furthermore, the 1993 Act provides that when the right to extend is exercised, the rent reduces to a peppercorn. It seems inconceivable that this could impact on the specified rent payable under a shared ownership lease but, again, this is something that may require further consideration in future case law.
In a situation where a registered provider (RP) holds an intermediate leasehold interest of a flat which is let to a shared owner, a further consequence of the change of shared ownership status is that the RP will lose their rights under the 1993 Act. Only the qualifying tenant with the most inferior interest in the hierarchy will be able to exercise 1993 Act rights. The only way in which an RP would then be able to extend their lease would be under a voluntary arrangement with their own landlord.
One further area that may be impacted by the Avon case, is income recovery for shared ownership leases. The judgment in Avon does touch on parts of the decision in Richardson v Midland Heart which found that, for the purpose of possession actions, a shared ownership lease is to be treated as an assured tenancy. However, as a shared ownership lease would still fulfil the requirements of Section 1 of the Housing Act 1988, the position appears to be unchanged for income recovery relating to shared ownership leases. That said, it remains to be seen how Judges will approach those cases considering the analysis of Section 76 in Avon, which arguably could impact on the standard practice of many RP landlords to pursue arrears on the basis that the shared ownership lease is a form of assured tenancy.
A changing legal framework for shared ownership leases
Following the Avon case, as the law stands, it is the case that shared owners qualify for the RTM. It is further arguable that shared owners will now qualify for lease extensions and collective enfranchisement under the 1993 Act, meaning that registered providers will need to decide whether to test this point in Court or accept the point and work through the valuation and other practical consequences.
The landscape of leasehold is continually changing, and the status of shared ownership leases is likely to be further changed if the current proposals set out in the Renters Reform Bill become law, as the status of shared ownership leases as a form of assured tenancy will be removed.
