Westbrook Dolphin Square Limited v Friends Life Limited (No. 2)

The High Court held that the nominee purchaser’s section 13 collective enfranchisement notice complied with the Leasehold Reform, Housing and Urban Development Act 1993 and that the claimant was entitled to acquire the freehold. Key legal principles applied were: the statutory definitions of qualifying tenants and "associated companies" (Companies Act 2006 s.1159) and their narrow application; the limited reach of Ramsay-style purposive anti-avoidance arguments where Parliament has provided a specific statutory test; the correct approach to construing and policing a tenant’s section 13 proposed purchase price (a genuine, bona fide opening offer rather than a distinct valuation floor); and the proper limits of transactions-at-undervalue relief under Insolvency Act 1986 s.423 (the undervalue must be causative of the prejudice to the claimant of the section).

The court rejected the freeholder’s principal challenges: that the SPVs were associated companies; that the Westbrook restructuring should be disregarded as an impermissible avoidance of the statute; that Human Rights Act 1998 arguments required a reinterpretation of the Act; that the reversioner was precluded from raising the 25% non-residential occupancy point because it was not pleaded in the counter-notice; and that the tenants’ section 13 price was invalid. The court also found that, on the facts, the non-residential parts did not exceed the statutory limit once Dolphin House and corporate housing were characterised as residential in purpose.

Background and nature of the application: The claimant (a nominee purchaser for participating tenant SPVs) sought a declaration that it was entitled to acquire the freehold of Dolphin Square under the Leasehold Reform, Housing and Urban Development Act 1993. The defendant freeholder challenged entitlement and validity of the tenants’ section 13 notice and relied on a series of defences including associated-company rules, statutory construction/anti-avoidance arguments, a Human Rights Act point, a section 4 (non-residential proportion) objection, a contention that the section 13 notice did not specify a proper purchase price, and a counter-attack under Insolvency Act 1986 s.423.

Key factual features:

• Dolphin Square is a large mixed residential and commercial complex. After acquisition and refinancing in 2006–07 the Westbrook group restructured the interests: over 1,200 flat leases were granted to some 612 SPV companies, six flats were retained, and Mantilla (a group company) operated serviced apartments branded "Dolphin House" and provided building management and leisure operations.
• The SPVs were Jersey companies with a shareholding structure designed to split voting rights between LLC and a holdings company held on discretionary trusts. The tenants’ notice (May 2010) specified a freehold price of c. £111.66m.

Issues framed by the court:

1. Whether the SPVs were "associated companies" for s.5(6) and thus disqualified from being qualifying tenants.
2. Whether the reorganisation and lease grants were to be disregarded as an abuse/avoidance of the Act (Ramsay-style reasoning) or a sham.
3. Whether an interpretation consistent with the Human Rights Act 1998 was required.
4. Whether the defendant could raise the section 4 (more than 25% non‑residential) point having omitted it from its counter-notice.
5. Whether a number of areas of Dolphin Square, notably Dolphin House and corporate housing, were occupied for "residential purposes" or were common/non-residential parts for the section 4 calculation.
6. Whether the section 13 notice satisfied the statutory requirement to "specify the proposed purchase price" and, if so, whether the figure fell within any applicable test.
7. Whether s.423 IA 1986 could be invoked to impeach the structure as a transaction at an undervalue.

Court’s reasoning and conclusions (concise):

• Associated companies: the Companies Act 2006 s.1159 definition relies on legal rights of control (voting, appointment, agreements) and does not extend to treating discretionary trustees as nominees simply because their sensible exercise of discretion would usually align with the settlor’s wishes. On the documents and facts the trustees had genuine discretions; the SPVs were not associated within s.5(6).
• Anti-avoidance/Ramsay arguments: although the restructuring was contrived to enable enfranchisement, the statutory wording is specific. The court would not read into "tenant of a flat under a long lease" a broader purposive gloss displacing Parliament’s chosen definitions; Arrowtown and Ramsay principles do not justify re-writing the statutory scheme here.
• Human rights: the defendant’s Article 1 Protocol 1 argument failed because the court could not identify a Convention infringement merely from Parliament’s imperfect achievement of asserted policy aims; no obligation to reinterpret the Act arose.
• Counter-notice scope: the court held the reversioner was not confined to points pleaded in the counter-notice; section 21 does not prevent raising an omitted section 4 point in subsequent proceedings, given the court’s duty to decide entitlement comprehensively.
• Residential purpose and common parts: on the facts Dolphin House serviced apartments and the corporate-housing operation were held to be "occupied for residential purposes" (occupation involved full living activities), and a number of disputed ancillary areas were not common parts or were properly characterised as residential. Consequently the premises satisfied the section 4 threshold.
• Section 13 price: the court followed authority (Cadogan v Morris; 9 Cornwall Crescent) that a tenants’ proposed purchase price must be a genuine, bona fide opening offer (not a nominal figure). It rejected an objective rule requiring the section 13 figure to fall within a precise Schedule 6 valuation range; on the facts the £111.66m figure was a bona fide opening offer and, on any arguable valuation approach, was within the range of reasonable outcomes.
• Section 423: the court held s.423 is aimed at transactions where an undervalue causes prejudice to creditors/victims in the way the statutory regime contemplates. Friends Life was not the kind of "victim" of an undervalue (as required) and the asserted undervalue (including the guarantee argument) did not provide the necessary causal nexus to impeach the enfranchisement steps.

Outcome: the court declared the claimant entitled to enfranchise and dismissed the defendant’s challenges in their entirety.

The claim succeeded. The court declared that the nominee purchaser was entitled to acquire the freehold. The court's reasoning was that the statutory tests in the Leasehold Reform, Housing and Urban Development Act 1993 (notably the definitions of "qualifying tenant" and "associated company") were not satisfied by the defendant's submissions; Ramsay-style anti-avoidance reasoning and Human Rights arguments did not justify rewriting the statute; the reversioner could raise the section 4 (non-residential proportion) point notwithstanding its omission from the counter-notice; Dolphin House and corporate housing were properly characterised as residential for s.4; the section 13 price was a bona fide opening offer (and within a reasonable valuation range on arguable valuation points); and the section 423 claim failed because the alleged undervalue was not the causative prejudice the provision addresses.

Proceedings were commenced in the county court (Case No: HC11C00069). Earlier proceedings based on a 2007 notice were discontinued in February 2009. The present proceedings were transferred from the county court to the High Court, Chancery Division, and determined by Mr Justice Mann ([2014] EWHC 2433 (Ch)).