Blog - 16/01/2015
Comment upon Westbrook Dolphin Square Ltd v Friends Life Ltd  EWHC 2433 (Ch)
In this case Westbrook Dolphin Square Ltd (“Westbrook”) sought a declaration that it was entitled to acquire from the freeholder Friends Life Ltd (“Friends Life”), pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”), the freehold of a freehold complex known as Dolphin Square, London SW1.
Dolphin Square is a substantial residential site in Pimlico, London made up of blocks (containing 1229 flats) with a minority commercial element. Westbrook, acting as a nominee, served notice of claim on Friends Life to purchase the freehold to Dolphin Square for a sum in excess of £100 million.
Friends Life held the freehold which was subject to a headlease with that headlease subject to a further underlease. Both leases were to expire in 2034. In early 2006, Tannenberg Ltd and Westbrook (both companies within the Westbrook Group) acquired both the headlease and underlease.
After its purchase, the group of which Westbrook formed part carried out a complete restructure of the leasehold interests in Dolphin Square which included the grant of 1,223 sub-underleases of the 1,229 flats. These sub-underleases were granted to 612 Jersey based companies (“the SPVs”) which were clearly special purchase vehicles incorporated for the purpose of granting the sub-underleases. No attempt was made to hide this as each was titled “Westbrook Dolphin Square Residential [X] Limited”, wherein in each instance a number was in place of the letter [X] to differentiate between each of the SPVs.
During the restructuring, Westbrook borrowed over £280m from Wachovia Bank which was used by the SPVs for each to pay a premium for its sub-underlease. Further evidence of the connection lay in the fact that Westbrook was jointly and severally liable for the facility provided by Wachovia Bank. The premiums were then used to pay back capital and a return to Westbrook’s various investors.
Friends Life argued that Westbrook’s claim was invalid because:
- The SPVs could not be considered as qualifying tenants because they were “associated companies” for the purposes of the Act.
- The deliberate restructuring of the leasehold interests constituted a sham scheme and it was not the intention of Parliament for the Act to allow such schemes.
In addition the following reasons (which are not the main focus of this article) were raised and can be read further in full at https://www.bailii.org/ew/cases/EWHC/Ch/2014/2433.html#para98:
- Friends Life’s rights under the Human Rights Act had been infringed.
- The claim should be disqualified on the basis that the freehold contained more than 25% commercial space.
- The proposed purchase price was unreasonable and rendered the notice of claim invalid.
- Friends Life was a victim of a transfer at an undervalue for the purposes of section 423 of the Insolvency Act 1986.
Where a tenant owns three or more leases then that tenant is not a ‘qualifying tenant’ for any of those leases so cannot take part in any claim for enfranchisement. The Act also prohibits ‘associated companies’ from holding more than two flats to prohibit any tenant who is a wholly-owned subsidiary of another to be involved in any one enfranchisement claim.
Westbrook, in granting multiple leases to the SPVs, did so to avoid that rule thus allowing the SPVs collectively to qualify for enfranchisement.
The trial judge, Mr Justice Mann, considered the control of the companies to decide whether the SPVs were actually independent of each other.
Westbrook’s argument was that the SPVs are not associated and sufficiently independent to be able to count as separate qualifying tenants because no one person had a majority of the voting rights or ability to appoint directors. Whilst the shares in each of the SPVs and Westbrook were held in the same way, 50% of the voting shares were held by a company which was controlled by trustees with complete discretion over voting.
Friends Life suggested that, in reality, the trustees were nominees in that they would only exercise their voting rights as directed by a company within the Westbrook Group.
Mann J found Friends Life’s argument ‘unappealing’ as the trust document expressly granted the trustees absolute discretion and there was little (if no) evidence that the trust arrangement was a sham.
In any event, since the Act relies upon a test which depends on legal rights of control, and not realities of a situation which might point to an otherwise de facto control, Friends Life failed on this point and it was held that the SPVs were not “associated companies”.
Secondly, Friends Life challenged the artificial nature of the leasehold structure and described the same as a ‘sham transaction’ because the SPVs and the leases granted to them were set up for the primary purpose of qualifying for enfranchisement.
Pointing to the drafting of Section 5 of the Act (the limit to how many flats may be owned by one tenant) and Westbrook’s clear attempt to circumvent the same, Friends Life submitted that Parliament had not intended enfranchisement to be applied to circumstances wherein leases had been created for the sole purpose of qualifying for enfranchisement. Reference was made to a ‘sham transaction’ principle (also known the Ramsay principle) which had primarily and previously been used in tax cases. It was acknowledged that this principle had not been restricted to tax cases and courts have accepted the principle in other schemes intended to circumvent statutory law.
Mann J did not doubt that the scheme was deliberately employed to qualify for enfranchisement describing it as ‘elaborate and carefully crafted’; nor did Westbrook dispute this fact.
Friends Life also cited the comments made by Ribiero PJ in the case of Collector of Stamp Revenue v Arrowtown Assets  6 HKCFAR 517 when he encouraged “the need to apply orthodox methods of purposive interpretation to the facts viewed realistically”. Friends Life’s contention was that the purpose of the statute was to prohibit someone who owns more than two flats from buying the freehold. The right to enfranchise is described as a “collective” right but in reality the SPVs were not acting as a collective of tenants because ultimately all the leases are within the same single ownership.
As a separate issue to whether the SPVs were considered to be “associated companies” (as defined by the Act), Friends Life suggested that the SPVs (that could at the least be loosely and colloquially described as connected companies) created solely to avoid the restriction at Section 5 of the Act, were against the spirit of the Act. Friends Life cited Lord Browne-Wilkinson in Pepper v Hart  AC 593 when he said “… reference to Parliamentary material should be permitted as an aid to the construction of legislation which is ambiguous or obscure or the literal meaning of which leads to an absurdity.”
Yet a distinction was drawn between the need to interpret the Act and the intention and policy of Parliament. Mann J could not find that there was anything ambiguous about Section 5 of the Act and would not permit reference to Hansard on the basis that Friends Life’s argument was not “an attempt to construe words in the statute, but to divine a purpose behind a provision in the statute, extract that purpose and then apply a principle that a person should not be able to evade that purpose because it was Parliament’s purpose”.
In his judgment Mann J took a strict approach to the interpretation of the wording of Section 5 of the Act and found that Westbrook had complied with the Act.
Parliament must have considered that investors would attempt to use the Act for commercial benefit but there is no express wording within the terms of the Act to prohibit enfranchisement for pure financial gain. Nor is there any provision within the Act to prevent different private individuals controlled by one person or entity (the writer has in mind connected family members, trustees or directors acting in behalf of companies) from launching an enfranchisement claim.
It is important to note that permission has been given to appeal to the Court of Appeal. Given the amount of the premium, it is quite possible this case will in due course proceed all the way to the Supreme Court. Watch this space.
For further information regarding this topic or any other property and construction matter, please contact the Edwin Coe Property team.
If you aren’t receiving our legal updates directly to your mailbox, please sign up now
Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
Edwin Coe LLP is a limited liability partnership registered in England and Wales (No. OC326366) and is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office: 2 Stone Buildings, Lincoln's Inn, London WC2A 3TH. "Partner" denotes a member of the LLP or an employee or consultant with the equivalent standing. Our privacy notice which we are obliged to give you under the GDPR is available here.