Airspace, subsoil and rights of first refusal

As readers of this newsletter will know, the notoriously problematic Landlord and Tenant Act 1987 gives a right of first refusal to lessees of flats where the landlord wishes to dispose of some or all of its interest in the property that contains the flats. In York House (Chelsea) Ltd v Thompson [2019] EWHC 2203 (Ch), [2019] 3 WLR 727 Zacaroli J. was asked to resolve various issues under the 1987 Act in a case where a husband and wife owned the freehold of a block of flats and, to preserve its development value, granted one or other of themselves leases of various parts of the block and its surroundings at peppercorn rents.

The first issue in the case was whether the grants of those leases were exempt from qualifying as ‘relevant disposals’ that trigger the right of first refusal. The court held that they were. The grant of each lease was exempt as ‘a disposal by way of gift to a member of the landlord’s family’ under s. 4(2) of the Act. That was sufficient to dispose of the tenants’ claim to acquire those leases but Zacaroli J. went on to discuss whether the individual leases would amount to relevant disposals triggering the right of first refusal if he were wrong on the first point.

Some of the leases in question (there were 14) included airspace above or subsoil beneath part of the block of flats. The tenants contended that the airspace and subsoil leases were relevant disposals (if not exempt as gifts to family members). It is on that aspect of the case that this article focuses.

By way of reminder, the right of first refusal attaches to a disposal affecting any premises to which Part I of the 1987 Act applies. Subject to specified exceptions (such as gifts to members of the landlord’s family), a disposal is a disposal by the landlord of any estate or interest in the premises, including the disposal of an estate or interest in any common parts of the premises [S. 4(1)]. A disposal also includes a contract for or an assignment of rights under a contract for a disposal. So, the right of first refusal applies not just where the landlord of the flats in the premises is intending to sell its whole interest but also when it is proposing to sell or grant a lease of part of the premises, except for the grant of a tenancy of a single flat which is excluded from the right of first refusal.

Where the right of first refusal exists, the landlord must serve a notice before making the disposal, or contracting to do so, giving the requisite majority of tenants the right to acquire the interest to be disposed of instead of the proposed purchaser or lessee. If the disposal is made, or an agreement to make it is executed, without the appropriate notice procedure having been followed, the requisite majority of tenants can acquire the interest in question from the purchaser or lessee.

Subject to exclusions for various categories of landlord, Part I of the 1987 Act applies to any premises which (a) consist of the whole or part of a building; and (b) contain two or more flats held by qualifying tenants when (c) the number of flats held by such tenants exceeds 50 per cent of the total number of flats in the premises [s. 1(2)]. A qualifying tenant is any tenancy except (a) a protected shorthold tenancy, (b) a business tenancy to which Part II of the Landlord and Tenant Act 1954 applies, (c) a tenancy terminable on the cessation of employment and (d) an assured tenancy or assured agricultural occupancy [S. 3(1)]. A person or company with tenancies of three or more flats in the premises is excluded from the definition of qualifying tenant. The rights granted by Part I of the 1987 Act can be exercised by the “requisite majority” of qualifying tenants which means more than 50% of the flats let to qualifying tenants [s. 18A].

Hence, a disposal of airspace or subsoil will be a relevant disposal affecting premises to which Part I of the Act applies if the airspace above the building or subsoil beneath it is part of the ‘building’ or ‘part of a building’ which comprises the premises in question, or if is a ‘common part of the premises’. In Denetower Ltd v Toop [1991] 1 WLR 945 the Court of Appeal held that ‘building’ for these purposes includes the appurtenances of the building.

The question whether the grant of an airspace lease was a relevant disposal for the purposes of Part 1 of the 1987 Act arose in Dartmouth Court Blackheath Ltd v Berisworth [2008] EWHC 350 (Ch), [2008] 2 P & CR 3. That case concerned premises comprising a block of 72 flats with a garage block, paths and gardens. The freeholder granted a lease of the airspace above the roof of the block together with some other areas including basement rooms without first serving a notice under Part I of the 1987 Act. The tenants applied to the court for an order entitling them to acquire that lease. One of the issues that had to be determined by Warren J was whether the right of first refusal applied to the airspace above the roof. He held that it did on two alternative grounds. First, he held that the airspace above the roof at least up to the height of the chimneys was appurtenant to and hence within the meaning of ‘building’ as used in the Act because “it is an essential part of the space over which any owner of the Main Building with repairing obligations would need to have adequate rights of access”. Secondly, he said that if his first ground was wrong the airspace was a common part as part of the exterior of the building.

In York House, Zacaroli J. followed Warren J. in Berisworth with regards to the airspace leases. Like Warren J, Zacaroli J. rejected the submission that a disposal of part of the building which is neither a common part nor subject to rights held by qualifying tenants was not a disposal affecting the premises. He held that the appurtenances of a building, which are part of it for the purposes of s. 1 of the Act, includes “areas over which the tenants have rights under their leases and areas which are usually enjoyed with the building, including those to which access is required by the landlord for the purposes of complying with its obligations (owed to the tenants) to repair and maintain the building”. One of the leases granted everything constructed above roof level and 30 meters of airspace above the roof. It was held that the airspace up to chimney height was appurtenant to and hence part of the building (the tenants accepted that airspace above chimney height was not subject to the Act).

The same analysis was applied to the leases including subsoil. The landlords were under an obligation in the flat leases to maintain the foundations of the building. Zacaroli J. held that because the landlords would require access to the subsoil in order to comply with that obligation, the subsoil was appurtenant to and part of the building, for the same reasons that airspace which would need to be entered in order to maintain the roof was part of the building. He did not rule on an alternative submission that the subsoil was a common part.

So, the grant of leases of airspace up to chimney height and of subsoil would have been relevant disposals if they had not been gifts to family members.

The decisions in Beresford and York House are ones that will repay careful reading by anyone contemplating the grant of leases of airspace above or subsoil below a block of flat with a view to future development.

Parts of this article are taken from Chapter 5 of Daniel’s recent book, A Practical Guide to Rights over Airspace and Subsoil (2019, Law Brief Publishing).