Concerned with the options available to leaseholders where the landlord or freeholder is an individual and they are absent or missing?
Leasehold flats will always have a landlord, in most cases the freeholder, who usually has ultimate responsibility for ensuring the building the flat is in, is kept in a good state of repair and will covenant to repair, maintain and insure the building, as well as enforcing the terms of covenants against other leaseholders in the building.
Where the landlord is absent, or missing, it is likely the case that those covenants will not be complied with which may have a detrimental effect on the building, is likely to affect the leaseholder’s ability to be able to deal with the property and may have an impact upon the value of the property.
Depending upon whether the landlord is a company or an individual will have a bearing upon how the leaseholders can go about buying the freehold. A company either exists or it does not. It is difficult for a company to be absent as, assuming that the company is a UK limited company, it will be registered on the register of companies held by Companies House. If the company has not been struck off the register, it exists, whether or not it has demanded ground rent or complied with its repair and maintenance obligations. If the company has been struck off the register and dissolved, it will simply no longer exist, it is not missing. By contrast, if the freeholder is an individual, it is possible for the freeholder to be absent or missing.
This note outlines the procedures that are available where the Landlord is an individual and “absent” and the available options in acquiring the freehold to the building under either the Leasehold Reform Housing and Urban and Development Act 1993 (“the 1993 Act”) or the Landlord and Tenant Act 1987 (“the 1987 Act”).
Both the 1993 Act and the 1987 Act set out procedures to be able to acquire the freehold to a building where the landlord is an individual and is absent.
The difference in approach in deciding whether or not to exercise the rights available under either the 1987 Act or the 1993 Act will to an extent depend upon the nature of the freeholders obligations under the terms of the lease and the length of the lease.
An application to acquire the freehold to a building or the interest of a superior Landlord (such as a Head Lease) under the 1987 Act will be based upon whether or not the Landlord, by being absent is in breach of his covenants under the leases of the property. Usually, the Landlord will be in breach of the lease by failing to carry out its obligations under the lease as a result of being absent, which means that the leaseholders can rely upon this piece of legislation to acquire the freehold. By contrast, an application to acquire the freehold under the 1993 Act simply needs to show that the landlord is absent. It is not necessary to demonstrate that as a result of their absence, they may be seen to be in breach.
In order to be able to make an application under either the 1987 Act or the 1993 Act, the first step is to ascertain how “missing” the Landlord actually is. If it is a natural individual, this will generally involve placing adverts in the national press and a publication local to the subject property asking for the missing person or anyone who is aware of the missing person’s whereabouts, to come forward and provide information. It will also involve usually instructing an inquiry agent to carry out a number of searches to see if the missing person can be found. Assuming that no positive response is received the next stage will be to decide which act will be relied upon to apply to acquire the freehold.
The 1987 Act
Where it is established that the landlord is indeed missing, the next stage will be to make an application to the County Court on the basis that the Landlord is missing and therefore in breach of his obligations under the leases of the building. Assuming that the court is satisfied that the landlord cannot be found they will then usually grant the order that the interest can be acquired by the tenants subject to payment of a sum into court, representing the missing freeholders share. A valuer will be appointed by the court to value the interest in their opinion as an expert. Once the price for the freehold has been ascertained, the funds are then paid into court and the freehold is then transferred to the leaseholders.
The 1993 Act
The 1993 act prescribes a similar procedure to acquire the interest. Assuming that the title is straightforward and just involves a freeholder and group of leaseholders, the leaseholders will need to make a similar application to the court dispensing with the requirement to serve a statutory notice of claim under section 13 of the 1993 Act on the basis that the freeholder is missing. Again, subject to the court being satisfied that the freeholder cannot be found and that the leaseholders have done all that may reasonably be expected of them to ascertain the whereabouts of the missing person, they will confirm that the freehold can be acquired by the leaseholder’s subject to paying a sum into court. The First Tier Tribunal Property Chamber will determine the price payable for the interest and upon payment of that sum into court, the court will give effect to the transfer of the interest of the freehold interest in the building to the leaseholders.
In both cases the funds are held by the court until such time as the missing person is no longer missing at which time they can apply for the funds to be released.
There are benefits of pursuing the interest under either the 1987 Act or the 1993 Act;
The 1993 Act
1. The leaseholders are not required to demonstrate that the landlord is in breach as a result of his absence
2. The leaseholders will pay what may be considered to be the fair value of the freehold as the premium due is calculated by reference to the statutory mechanism that is set out in the 1993 Act. This will include compensating the landlord for;
1 The loss of ground rent over the remaining term of the leases;
2 The loss of interest in the reversion to the building (the value they may expect to receive in the building were the leases to determine at the end of their term assuming that the leaseholders did not have any statutory rights to extend their leases);
3 Where the lease is under 80 years, marriage value; and
4 Any other losses (e.g. development value).
3. The leaseholder will be able to apply for some of the costs of making the application to court to be repaid from the amount to be paid into court for the freehold interest in the building. Were the landlord not missing, the leaseholders would be responsible for certain elements of the landlords costs. It is likely that this will be borne in mind by the court and reflected in the amount of any order for costs that may be awarded.
The 1987 Act
1. The tenants will have to demonstrate to the court that, as a result of being absent, the landlord is in breach.
2. The leaseholders will pay the “market value” of the freehold. This will usually be calculated by reference to the valuation principles set down in the 1993 Act however, as it is a market valuation, deductions will be made for any price that may be made by an investor. Importantly, it will not involve payment of marriage value where the leases of the various flats are under 80 years. It is not uncommon for a percentage of marriage value to be paid as “hope value” as a reflection of the price an investor may apportion to such an interest in the hope that, were the interest to be acquired subject to short leases, an application may be made for a lease extension at some point in the future.
3. In terms of costs recovery, the leaseholders have more wide-ranging opportunities to be able to recover a greater proportion of their costs from the amount payable into court for the freehold interest in the building as the costs liabilities under 1993 Act are not triggered.
On balance if the leases of the flats have under 80 years unexpired, the opportunities under the 1987 Act are far more attractive to the leaseholders as they potentially will pay a lower premium for the freehold interest in the building and they will have better opportunity to be able to recover a higher proportion of costs from the amounts payable for the interest.
In both cases it is necessary to ascertain what the appropriate interest for taking the freehold will be, whether it is to be held by a group of not more than 4 individuals, whether in trust for a larger group of tenants or whether by a company limited either by share or guarantee. This will in part be determined by how large the block of flats is.
Specialist legal and valuation advice should be obtained when deciding to pursue the freehold to a block where the landlord is absent. The above gives only an outline of the options available and the processes involved and it is quite possible, depending upon the title structure of the building, that an acquisition will be more involved than that which is considered above.