Cadogan v Panagopoulos & Anor

Under the Leasehold Reform, Housing and Urban Development Act 1993, anti-avoidance provisions must be construed fairly and practically, but clear statutory language should not be enlarged merely because a transaction substantially diminishes the freeholder’s reversion. A 999-year lease at a peppercorn rent remains a lease and is not a disposal severing the freehold. A caretaker’s flat used for building-wide services can be a common part, and its acquisition may be reasonably necessary for proper management. An enclosed light-well may also be a common part, but acquisition is unnecessary where lease reservations adequately protect management and maintenance rights. Disposal of the freeholder’s interest means transfer of the freehold, not every lease granted out of it.

Qualifying tenants of 51 Cadogan Square served a section 13 notice seeking collective enfranchisement. After registration of the notice, the freeholder granted Cadogan Estates Limited a 999-year lease of the basement caretaker’s flat and the floor of an adjoining light-well or patio.

The County Court held that the lease was caught by section 19 on several alternative grounds. The freeholders appealed. The issues were whether the grant severed the freehold, whether the demised areas were common parts whose acquisition was reasonably necessary, and whether the grant was a disposal of the freeholder’s interest under section 19(2) and (3).

1. Appeal dismissed. The grant was not a disposal severing the freeholder’s interest under section 19(1)(a)(i). The provision referred to a true severance of the freehold reversion. A very long lease did not become equivalent to a freehold merely because little practical value remained in the reversion.
2. “Common parts” includes parts of a building which may be used by, or serve the benefit of, residents in common. Actual use by every resident is unnecessary. A caretaker’s flat can be a common part where it houses a caretaker servicing the building. Its acquisition was reasonably necessary because the participating tenants could not provide the required caretaking services without acquiring the lease.
3. A residential flat is not necessarily excluded from being a common part. Sections 2(4) and 4 did not establish mutual exclusivity. The court adopted a functional approach and, alternatively, found that the lease covenants requiring or funding caretaker accommodation supported the same conclusion.
4. The light-well was part of the exterior of the building and therefore a common part. Its acquisition was not reasonably necessary under section 2(3), however, because the lease reserved adequate rights of access and entry for inspection, repair and maintenance. Speculation about future technological requirements was insufficient.
5. Section 19(2) and (3) applied to transfer of the freehold interest, placing the transferee in the original freeholder’s statutory position. They did not apply to the grant of a lease out of the freehold, since the statutory consequences could not sensibly operate on that construction.
6. The lease was therefore void under section 19(1)(a)(ii) because it included the caretaker’s flat. The alternative section 19(2) and (3) argument failed.

• High Court (Chancery Division): Appeal from the County Court decision dismissed. The lease was void under section 19(1)(a)(ii), although the other grounds were rejected.