IT ALL WENT SWIMMINGLY FOR WESTBROOK AT DOLPHIN SQUARE
In July Mr Justice Mann handed down his eagerly awaited judgment concerning the largest collective enfranchisement claim made to date under the Leasehold Reform, Housing and Urban Development Act 1993 in respect of Dolphin Square – Westbrook Dolphin Square Limited v Friends Life Limited & Others. Westbrook, advised by our chairman, Damian Greenish, were successful in defending the freeholder’s High Court challenge to its right to enfranchise the block!
What has distinguished this particular claim is the structure that was set up for the sole purpose of enfranchising. In 2006 Tannenberg Limited and Westbrook Dolphin Square Limited, being part of the US based Westbrook Partners, acquired the headlease and underlease of the block. Next, 612 Jersey registered companies were incorporated (“SPVs”) each of which acquired long sub-underleases of two flats in the complex. 50% of the voting rights in the SPVs were held by Delaware registered WB Dolphin Square LLC with the other 50% being held by WB Dolphin Square Holdings Limited, itself controlled by Trustees under a discretionary trust.
Whilst acknowledging that the scheme was set up for enfranchisement purposes, the Judge was not prepared to infer that Parliament had intended to catch other anti avoidance measures beyond that specifically provided for in the 1993 Act, nor was he impressed with the freeholder’s argument that its human rights would be infringed. It will be interesting to see whether other structures involving trusts, for example, become more common to provide an opportunity for enfranchisement which would not otherwise be available.
Some other interesting points were argued:
It was argued on behalf of the freeholder that the SPVs could not be qualifying tenants of any of the flats they owned on the basis that they were “associated companies”. By virtue of sections 5(5) and 5(6) of the 1993 Act if three or more flats are owned by associated companies none of those flats are regarded as being owned by qualifying tenants. The Judge decided that they were not associated companies within the definitions set out in the Companies Act 2006. Whether companies are associated depends upon legal rights of control and there was no agreement in place which would give the LLC or Holdings control of the SPVs.
Relying on a point not set out in the counter-notice
The freeholder was allowed to challenge Westbrook’s entitlement to make the claim on a point which was not included in its counter-notice. That seems surprising but the judge’s reasoning is hard to question: if no counter-notice is given, the court still has to be satisfied that the participating tenants were entitled to make the claim before making a declaration to this effect and the freeholder is able to challenge entitlement on any grounds it sees fit. It would be anomalous that a reversioner’s grounds of challenge should be limited in circumstances where a counter-notice has been given and not so limited where no counter-notice is given. Further, the Act provides no sanction for failure to include all grounds of challenge in the counter-notice.
The Residential/Non-Residential point
The new point of challenge was that more than 25% of the premises were occupied for non-residential purposes. The Judge determined that the various areas in dispute were either occupied/intended to be occupied for residential purposes or comprised in the common parts. Although he stopped short of formulating a test for “non-residential or residential purposes” he did set out some useful guidance. He accepted that it is possible for premises to be used for residential purposes without being anyone’s home. Parliament had chosen an expression which suggests an objective view of the premises, not tied to a specific occupier. Westbrook’s submission that “residence” connotes use for the usual activities of living – sleeping, eating and washing without the need for such accommodation to be for any fixed or minimum period – was accepted.
Is there a valuation test?
The Act provides that a tenant’s notice must specify the “proposed purchase price” for the interests he is to acquire. The nominee purchaser argued that the proposed price need only be a genuine opening offer which was not purely nominal. The Freeholder argued that it should be based either on an objectively justifiable price in valuation terms or on the subjective views of the tenant as to its justifiability in valuation terms.
The Judge drew the following conclusions:
• An offer must not be nominal
• It must not be so low that the tenant cannot intend to pay it or not bona fide such that any tenant would know it would be regarded objectively as ridiculous
• It must be an offer that would be taken to be serious, indicating good faith and presaging a sensible negotiation
• It does not need to be one which the tenant believes is likely to be accepted. Any reasonable tenant is likely to anticipate a counter-offer as that is what happens in reality
• Good faith is the central test rather than an objective one noting that an offer can be made in good faith even if it is outside the range of acceptable values.
The figure proposed by Westbrook satisfied those tests.
Transfer at Undervalue
The final, and somewhat unusual, issue to be determined was whether the freeholder was a “victim” of a transfer at an undervalue under insolvency legislation should the claim proceed. This is usually encountered where a debtor has disposed of assets at less than their true value to put them beyond the reach of its creditors in the event of a winding up. The question was whether the grants of the SPV leases were transactions at an undervalue.
The SPVs leases had been funded by a bank loan. Westbrook was jointly and severally liable with the SPVs for the whole debt. The loan had been based on a valuation of the premises which, it was said, demonstrated that the SPV’s leases were worth more than they had paid for them.
The judge was not impressed with the arguments relied upon by the freeholder in support of this ground of challenge and decided that there was no relevant transaction at undervalue. Even if there had been a relevant transaction, it was not at an undervalue and even if it had been at an undervalue the freeholder was not entitled to the benefit of the insolvency legislation as there was no connection between the alleged transaction and the prejudice it claimed it would suffer if the claim proceeded and its freehold interest was acquired by the nominee purchaser.
The win is of great significance to Westbrook and will enable it to focus its energy on finalising the purchase of Dolphin Square with a conservative value of £117m.