Shared ownership leases are long leases, and why it matters for landlords

In Avon Ground Rents Limited v Canary Gateway (Block A) RTM Company Ltd [2023] EWCA Civ 616, the Court of Appeal confirmed that, even where a shared ownership lease has not staircased to 100%, it is still a "long lease" for the purposes of the Commonhold and Leasehold Reform Act 2002, and could form Right to Manage (RTM) companies. We explore what this means for landlords, and note that it remains to be seen whether this case will go to the Supreme Court.

What is a shared ownership lease?

Shared ownership leases are often seen as more affordable way for people to get onto the housing ladder, because a smaller deposit and mortgage is required – people buy a share of a property and then pay a subsidised rent on the remaining share. Over time, owners can buy further shares in the property, known as 'staircasing', until they own the property fully (100% staircased).

The problem

Canary Gateway (Block A) RTM Company Ltd ("the Company") was established by residents with the intention of acquiring the right to manage Block A, Canary Gateway. As a matter of law, before the Company could make a claim for the right to manage, it should have served, in a prescribed form, a "Notice of Invitation to Participate" upon all qualifying tenants who were not already members of the RTM company. "Qualifying tenants" are defined in section 75 of the Commonhold and Leasehold Reform Act 2002 ("the 2002 Act): a person is the qualifying tenant of a flat if he is tenant of the flat under a long lease. Therefore, it was important to understand what a long lease was (Sections 76-77 of the 2002 Act).

Block A in Canary Gateway estate in East London contained some long leases to qualifying tenants (no argument there), but also two headleases to Metropolitan Housing Trust ("Metropolitan"). Metropolitan let out its flats as both social housing but also on shared ownership leases. Some of these Metropolitan shared ownership leases had not staircased to 100% ownership. The Company did not consider they were "long leases" under the 2002 Act and so did not serve them with a Notice of Invitation to Participate.

In these related proceedings, the dispute between the freeholder and the Company was the proper construction of s.76 of the 2002 Act.

The law

Section 76 of the 2002 Act defines "long lease" as below, insofar as is relevant here. Was a shared ownership lease a "long lease" only if it came within category (e), where shared ownership was expressly mentioned, or was it sufficient if it satisfied any of the other grounds?

Section 76 of the Act:

The freeholder argued that a lease can fall through s.76(2)(a) but then be caught by s.76(2)(e). Therefore, shared ownership leases below 100% ownership were not long leases for the purpose of the 2002 Act.

By contrast, the RTM company argued that (a)-(f) were alternatives, so that as long as a shared ownership lease came within any of these gateways, it was a "long lease". Consequently, if a shared ownership lease was granted for a term of more than 21 years (as they always were, and as they were here), then it would come within s.76(a) and would be a "long lease", whether or not the tenant had a 100% interest. Paragraph 76(e) would not be applicable, but paragraph 76(a) would, and that was sufficient.

It is also worth noting that the explanatory notes to the 2002 Act stated – incorrectly, as it turns out – that a shared ownership lease was only a long lease for the purposes of the right to manage if the leaseholder owned a 100% share of the lease.

What did the Court of Appeal decide?

The court dismissed the freeholder's appeal and affirmed the earlier decisions in this case by the tribunal. In so doing, it considered the previous, conflicting, cases on this point. Ultimately, a lease was a "long lease" if it fit into any of the categories in s.76(a)-(f), as (a)-(f) are clearly expressed to be alternative gateways. So, a shared ownership lease for a term of more than 21 years will be a "long lease" whether or not the tenant has a 100% interest.

Furthermore, the court noted that the language of s.76 of the 2002 Act was intended to mirror that language of s.5, Leasehold Reform, Housing and Urban Development Act 1993 (giving the right to collectively enfranchise). This was because the intention behind the RTM provisions in the 2002 Act was that in general, RTM should be exercisable by those same leaseholders who would be eligible for collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993.

Tenants with long shared ownership leases who have not staircased to 100% will still have an obvious interest in how the premises are managed, the more so since they will typically pay full service charges. That being so, Parliament might have been expected to have intended them to be able to participate in management issues; therefore they should be entitled to form an RTM company.

Key points for landlords

1. Look for qualifying tenants: A shared ownership tenant with a term of more than 21 years will be a "long lease" and therefore a qualifying tenant for the purposes of participation in a right to manage company and the enfranchisement process.

2. Unintended consequences: As noted by counsel, the language of s.76 of the 2002 Act mirrors statutory provisions allowing for lease extensions. It is therefore arguable that shared owners not staircased to 100% can take advantage of this process.

3. Don't get comfortable: The freeholder intends to seek permission to appeal to the Supreme Court; if permission is granted the law may change again.

If you have any questions about this article, please get in touch with real estate partner Dominic Morris or property litigation principle associate Senay Nihat.