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Leasehold – When is a long lease a problem?

Long leasehold properties have recently been on the receiving end of negative publicity in the wake or the leasehold house scandal. The Leasehold Knowledge Partnership Campaign believes that there are 100,000 families trapped in houses that are virtually unsellable because of rising ground rents.

In December 2018, 21,044 leasehold properties were sold[1] and submitted for registration at Land Registry which was 24% of all properties sold that month so, despite the recent focus, leasehold property is common, and likely to stay for the foreseeable future.

 Holding a leasehold interest is not, in itself, a problem: Flats, in particular, are usually leasehold to enable covenants imposed on ownership to be enforceable against subsequent owners. Restrictive covenants governing noise, nuisance and upkeep of shared facilities are essential in a building containing flats and each flat will be bound by the same covenants.  Problems arise with leasehold when there is no compelling reason for a leasehold structure and where the ground rent payable has moved away from a nominal rent to a level which is or will become unsustainable – such as a ground rent of thousands of pounds annually.

Even where leasehold ownership is desirable, the disadvantage is that a lease is a decreasing asset and will have to be handed back to the landlord at the end of the term, remains. Once a lease has less than 70 years left, many high street lenders will not lend on the property, restricting prospective purchasers to those who are not dependant on mortgage finance.

 A lease can be extended by paying a premium to the landlord. Flat owners who have owned the property for more than 2 years have a statutory right to a lease extension so the landlord cannot refuse to grant it. The lease will be extended by 90 years and the ground rent reduced to zero (a peppercorn) so extending the lease can be a mechanism for getting rid of an escalating ground rent although unfortunately for those properties worst affected by very high and frequently doubling ground rents, the cost of extending may be prohibitive.

If your property is leasehold and you want advice on the terms of your existing lease or options for extending your lease,  or you are considering buying a leasehold property and want to know if the lease is going to cause issues in the future,  then please don’t hesitate to contact SLC Solicitors. We are a law firm for clients with high expectations. We provide specialist services in leasehold law nationwide and combine creativity and flexibility with our unrivalled expertise to deliver results.


[1] Source: HM Land registry Price Paid Data

Metamorph Group Limited acquires Verisona Law

Metamorph Group Limited has acquired leading Hampshire legal practice, Verisona Law, with offices in Portsmouth, Waterlooville and Gosport, the latter trading as Donnelly & Elliott.

This acquisition strengthens and enhances Metamorph Group’s existing South Coast offering by bringing additional expertise in commercial matters, a strong commercial property practice bolstered by Verisona Law’s recent acquisition of Donnelly & Elliott, and well-regarded, community- focused teams in matrimonial and family law, residential conveyancing, litigation and wills, trusts and probate. Metamorph Group’s existing Southampton office will now trade under the Verisona brand.

The deal is expected to add revenues of around £5m per annum.

Metamorph Group’s Executive Chairman, Tony Stockdale, commented:

‘The acquisition of Verisona Law adds further depth and quality to our operations and brings some of the leading legal teams in the area into our business. It adds a respected local brand to our stable and fits perfectly with our strategy to grow as a single business with multiple brands.’

Sue Ball, Managing Director of Verisona Law, will join the Metamorph management team, working closely with other offices within the group and comments:

‘We are very proud that Metamorph Group has seen such potential in all we have built and achieved over the past decade. Though there will be no difference in terms of our client service, being part of the group strengthens all Verisona Law has to offer and ensures a bright future for both our clients and highly valued staff.’

Reform recommended for Lease Extension and Enfranchisement

The Law Commission has published a summary paper of changes it recommends for the law relating to extending the leases of houses and flats and buying the freehold of buildings containing flats.

The proposals are an attempt to strike a difficult balance between reducing the price payable by leaseholders who want to buy their freehold or extend their lease, while ensuring that Landlords (who cannot refuse an application while qualifies under the current legislation) are adequately compensated for losing their interest in the property.

Some of the main changes proposed are:

For extending leases:

For buying a freehold containing flats:

The current law has been criticised for being complex with separate procedures applying to each of the different enfranchisement rights. The proposals recommend a single procedure for enfranchisement to simplify the process and improve transparency to ultimately provide a better deal for leaseholders.

The Commission is inviting responses from Leaseholders and Landlords to the proposals and the deadline for replies is 7th January 2019.

SLC Solicitors are experts in this area and can assist you with lease extension or enfranchisement claims. We can offer fixed fees and value for money guidance on the complex regimes in place.  If you would like more information please contact Analise Broomhall ADB@SLCSOLICITORS.COM

Leasehold Properties – Ground Rents, ASTs and Termination

While there has been a great deal of recent  media attention relating to leasehold houses and escalating ground rents, there is another issue relating to ground rents that landlords, flat owners  and mortgage lenders need to be aware of.

Assured Shorthold Tenancies (ASTs) are usually short term lets, however, under current leasehold legislation once the ground rent reaches a certain level, long leases can also be classed as ASTs which creates a risk of  termination by a landlord and is of particular concern to mortgage lenders.

Any long lease commencing after the Housing Act 1996 came into force, may be an AST if:

Termination rights

If there are arrears of  ground rent or any other breaches of a long lease, the usual procedure is for the landlord to issue a Section 146 notice (under the Law of Property Act 1925 ) and apply for forfeiture (i.e. termination) of the lease.

The tenant is given a reasonable time to remedy the breach (if it is capable of remedy) and Court proceedings cannot be commenced unless the tenant fails, within a reasonable time, to remedy the breach.

Upon application by the Tenant, the court will usually  grant relief and cancel the forfeiture as long as the arrears are paid in full.

However, if the lease is an AST,  the court has NO discretion to grant  relief from forfeiture.

Therefore in the event that:

the court MUST terminate the lease and give possession of the property to the landlord.

The simple solution for the tenant is, of course, to pay the arrears. However, while a mortgage lender may normally seek to protect its security by paying the arrears, this has become an issue, because the mortgage lender may not know about the arrears until the lease has been terminated.

This has led to banks questioning whether to lend if there are high or escalating ground rents, because if a landlord can forfeit a long lease for non-payment of rent without the possibility of relief, the property may not be regarded as having good and marketable title.

In December 2017, the government issued a consultation paper – ‘Tackling unfair practices in the leasehold market’ and this issue was included in the review. It noted that tenants could be subject to a mandatory possession order if they were in default of payment of ground rent even for small sums and so the government has stated that it will take action to address this “loophole”.

While this ground rent issue may be under review,  in the short term, a solution is required to ensure that properties are marketable and mortgage lenders are willing to lend

Another issue of concern is how this affects a group of tenants’ right of first refusal. Under section 5 of the Landlord and Tenant Act 1987, a landlord who wishes to sell the whole or part a block of flats must offer a right of first refusal to the “qualifying tenants” in the block.

However, an AST is not a qualifying tenancy for these purposes, so the tenant would not need to be notified of any intended sale of the block.

Further, depending on the size of the block, the block as a whole may become exempt from a right of first refusal because it only applies if more than 50% of the flats are held by qualifying tenants.

 Solutions

To reduce the risk of the landlord terminating a long lease for arrears of rent, it is arguably within the control of the tenant to pay the ground rent on time and ensure that there are  no arrears.  However, a mortgage lender is unlikely to obtain sufficient comfort from this and may insist on other protections.

Possible solutions include:

If you  would like advice on any of the issues raised here, please contact Joanne Macdonald Jem@slcsolicitors.com on our property team for further information.

Dilapidations

1) The term “dilapidations” refers to breaches of lease covenants that relate to the condition of the property, and the process of remedying those breaches.

2) Some Definitions

A “Schedule of Dilapidations” is a document prepared by the Landlord (or their surveyor) which lists the allegations, suggests remedial works and sometimes estimates the costs of those
remedial works.

A “Quantified Demand” is a document prepared by, or on behalf of, the Landlord which sets out further details of the allegations. It is only issued after the end of the lease. It includes details of what the Landlord considers to be its likely loss as a consequence of the tenant’s alleged breaches. The likely loss does not always equate to the cost of the works set out in the Schedule of Dilapidations.

A “Response” is the reply from the Tenant (or their surveyor) to the Quantified Demand and/or Schedule of Dilapidations. This normally takes the form of a covering letter / email and a Scott Schedule.

A “Scott Schedule” is an extended version of the Schedule of Dilapidations which allows space for the Tenant’s surveyor to comment on the content of the Schedule of Dilapidations

3) Prior to signing the lease

Familiarise yourself with the lease terms and their dilapidations implications prior to signing the contract. A chartered building surveyor can advise you of the implications of the clauses you are signing up to.

4) During the lease term

Consider their potential future dilapidations liability in good time, and budget for that future obligation.

If you undertake alteration works to the premises then it is likely that your landlord may require you to reinstate those alterations shortly before the end of the lease. A Licence for Alterations (or Licence to Alter) is often agreed which sets out the obligations.

5) Near the end of the lease term

Dilapidations disputes can ultimately end in a court.
You may be advised to make offers to settle at various stages, and should consider such advice carefully, as it may be referred to later in court.

You should be aware of the extent of dilapidations work you have committed to complete.
It is normal to engage a chartered building surveyor, experienced in the field of dilapidations and familiar with the case law, to advise you.

Unless you have completed all the building work which the lease and any licences for alterations require of you then you should expect to receive a Schedule of Dilapidations from your Landlord.
Even if the Landlord does not send you a Schedule of Dilapidations you still have potential dilapidations obligations and a chartered building surveyor can give you advice as to the scope and potential cost of the obligations.

If you do not complete the dilapidations works before the end of the lease term then your landlord can claim damages from you to recompense them for the adverse financial position they find themselves in, because you did not complete the dilapidations works.

6) After the end of the lease term

You should have received a Schedule of Dilapidations and, within about 56 days after the end of the lease, also a Quantified Demand.

However, you should be aware that the landlord’s entitlement to start a court claim will not become legally time-barred for six or 12 years (depending upon how the lease is signed) after expiry of the lease. Some leases contain a specific timescale for service.

The Landlord or their Surveyor should have endorsed the Schedule of Dilapidations to confirm that it is reasonable and reflects the Landlord’s intentions for the building.

You are expected to respond to the Schedule of Dilapidations and/or Quantified Demand within about 56 days of receipt. Your Response should also be endorsed by you or your Surveyor.

Normally, the surveyors appointed by the Landlord and Tenant meet and can narrow the differences sufficiently to recommend a settlement figure to their respective clients.

If such a settlement is not possible then you may be faced with potential litigation from your former landlord. The Dilapidations Protocol states that the parties should consider alternative dispute resolution (ADR) in dilapidations cases.

Landlords beware – what constitutes “sufficient notice of proceedings”

Landlords beware – what constitutes “sufficient notice of proceedings” to enforce possession orders using High Court Sheriff enforcement procedure.

The High Court has recently provided guidance to what constitutes ‘sufficient notice of proceedings’ by Landlords seeking to enforce a possession order by High Court Sheriff enforcement method.
In Partridge v Gupta 2017 the Landlord served a S.21 notice and obtained an order for possession in the County Court. The landlord subsequently applied for the case to be transferred up to the High Court in order to speed up the enforcement procedure.

The landlord wrote a letter to the tenant notifying him that:

• They had made an application to transfer the case up to the High Court
• They had an intention to make an application for a writ of possession

The High Court granted the writ of possession and the tenant appealed the decision seeking to have the writ set aside on the basis that they he not have ‘sufficient notice of proceedings’ that were being issued against him notwithstanding the fact that he was fully aware of the County Court possession proceedings.

The High Court, in Partridge, distinguished between a sole tenant and a tenant having other occupants.

Where there is a sole tenant who is the subject of the possession order and he has full knowledge of the possession proceedings, a reminder of the terms of the court order and a request that possession is given up under the order is, generally speaking, sufficient notice.

Where the sole tenant has played no part in the possession proceedings, a letter or other suitable form of communication containing all of the above information should ensure that sufficient notice has been given.

Where there are occupants other than the tenant to the possession proceedings known to occupy the property then a letter addressed to them (if known by name) or to “the occupants” (if the names are not known) is necessary and needs to include reference to the intention to apply for permission to issue a writ of possession if express possession is not delivered up by the date prescribed in the order and that eviction will follow.

Partridge v Gupta 2017 highlights the importance for Landlords to be vigilant when seeking to enforce possession orders by writ in the High Court as the wording of the notice, in the case of multi-occupants, is very important and must include reference to the “intention to apply for permission to issue a writ of possession if possession is not delivered up by the date prescribed in the order and that eviction will follow”.

Upper Tribunal ruling on student accommodation

Upper Tribunal rules that student accommodation that shares communal areas is not a dwelling for
the purposes of section 27A of the Landlord and Tenant Act 1985.

Section 27A of the Landlord and Tenant Act 1985 provides that an application may be made to the
First Tier Tribunal for a determination as to whether a service charge is payable, if so by whom, the
amount payable and the date by which it is payable.

Under section 18(1) of the said Act a service charge is defined as being an amount payable by a
tenant of a dwelling for services of various kinds. Dwelling is defined by the Act as a building or part
of a building occupied or intended to be occupied as a separate dwelling, together with any yard,
garden, outhouses and appurtenances belonging to it or usually enjoyed with it.

In JLK Ltd v Emmanuel Chiedhu Ezekwe and others (2017) UKUT 277 (LC) the Upper Tribunal (Lands
Chamber) has concluded that student accommodation in which the students had the right to share a
kitchen, lounge, shower and w.c. with every other tenant on the same floor did not amount to a part
of a building which was occupied or intended to be occupied as a separate building.

The specific facts are that the property comprised 93 units of accommodation of which all but six
had en suite facilities (the remainder sharing communal showers and toilets). Each unit was let on a
long lease comprising the unit plus the right to use communal kitchens, bathrooms, showers and
other areas. The lease included a covenant to pay a maintenance charge in respect of the sums
spent by the landlord in the maintenance of the building. A dispute arose and an application was
made by a number of the students to the First Tier Tribunal (FTT) for determination of the sums
payable.

The FTT concluded that the units were dwellings and that it therefore had jurisdiction to determine
the applications. The landlord appealed this decision on the basis that the units could not be a
dwelling as they were not a home and that they were not separate dwellings because of the
communal facilities.

The Upper Tribunal rejected the argument that to be a dwelling, a unit of accommodation must be
someone’s home. Then Act did not require this, however the Upper Tribunal accepted the argument
in respect of the units not being a separate dwelling. In reaching this decision it concluded that it
must have regard to the meaning given to the phrase “as a separate dwelling” for the purpose pf the
Rent Acts and the Housing Act 1988.

Accordingly the Upper Tribunal decided that the FTT did not have jurisdiction to deal with the
students’ applications.

This is a decision that could have ramifications for other types of property where similar
circumstances exist in relation to section 27A of the 1985 Act and for other areas of the law in
relation to long leasehold residential property which depend on the same or a similar definition of
dwelling.

Can You Recover Costs in a Small Claims Dispute?

The basic position is that for claims which have been allocated to the Small Claims Track, usually with a monetary value of less than £10,000, the Court will not order a party to pay fees or expenses to the other party, subject to certain exceptions.

One of those exceptions is if the Court thinks a party has behaved unreasonably.

The question of what constitutes unreasonable behaviour was considered recently in the case of Dammermann v Lanyon Bowdler Solicitors (2017). In short, the Court considers whether rejection of a reasonable offer by one of the parties during the course of proceedings could amount to unreasonable behaviour. Usually, a party that rejects a reasonable offer can expect to be penalised by the Court and find itself subject to an adverse Costs Order. However, in the context of this case, the rejection of what was perhaps considered to be a reasonable offer was not automatically considered to be evidence of unreasonable conduct as the Court took into account a number of other material factors to the case.

The question therefore is whether this case sets a precedent that the rejection of a reasonable offer on its own will ever justify a finding of unreasonableness. This should not be considered to be the “golden rule” and each case is likely to be determined on its own facts.

One must never ignore the general principle that the Small Claims Court procedure is designed so as not to deter individuals from pursuing claims without legal representation or for fear of receiving an adverse Costs Order.

There is clearly a difference in claims which may be considered ‘optimistic’ to claims where litigation is pursued unreasonably. On the other hand however, this does not mean that you should be put off from seeking costs if your opponent’s conduct is such that it is clearly inappropriate.

Depending upon which side of the table you sit, the threat of a costs order for unreasonable conduct can still be a useful tool in your negotiating armoury.

For further advice on small claims disputes or recovering costs, please contact our Litigation Process Team on 0333 0300 200 or email info@slcsolicitors.com.

Right Of First Refusal – The Exceptions

As we have mentioned in a prior article (link below) it is essential that a Landlord making a “relevant disposal” of a building containing flats should comply with the requirement to offer the tenants the interest first (by serving a section 5 notice on them) as they have a right of first refusal under the Landlord and Tenant Act 1987 (“the Act”).

http://www.slcsolicitors.com/news/right-of-firstds-and-tenants/

For the Right of First Refusal (RFR) to exist the building must:

  1. Contain at least two flats
  2. Not have more than 50% non-residential use
  3. Have more than 50% of the flats held by qualifying tenants

The requirements apply to all “relevant disposals” BUT the RFR only applies where the tenants’ immediate landlord is selling, so where there is an intermediate landlord, the freeholder could dispose of their interest without invoking RFR.

Creation of a new head lease, sale of the reversion and a disposal of common parts of the property ALL constitute a “relevant disposal” for the purposes of the Act.

Where the disposal is subject to a contract the disposal occurs on the date of the contract and NOT on completion of the sale.

The legislation does however provide for some disposals to be exempt including (but not limited to)

  1. The grant of a tenancy of a single flat
  2. A disposal by way of security for a loan
  3. Some disposals relating to inheritance or matrimonial provisions
  4. A disposal by a company to a company that has been associated with it for at least two years.

WHERE LAND IS HELD BY A COMPANY

In respect of the last point, a company is “associated” with another company within the meaning of the Companies Act if one company holds a majority of the voting rights in it OR is a member of that company and has the right to appoint or remove the board of directors.

A tenant who receives notice that a disposal is exempt for this ground should investigate at Companies House whether the companies are in fact “associated”. Simply having the same directors will not be sufficient.

Currently if a landlord in a qualifying building wants to avoid the provisions of the Act he must:

  1. Create an associated company and wait for at least 2 years
  2. Transfer the property to the associated company
  3. Sell the shares in the associated company

If these steps are followed, the disposal will not be a “relevant disposal” for the purposes of the Act as transaction (2) above was exempt and in transaction (3) only the shares in the company, not the property itself was transferred.  However, this must be treated with extreme caution. Transfer (3) must take place after the transfer of the land. A landlord must take particular care that – where they have entered into an agreement with a purchaser for the sale of the shares conditional on the purchase of the land – at the time of the transfer the landlord must not be deemed to hold the shares in a fiduciary capacity for the purchaser. If this fiduciary capacity exists then the disposal would not be to an associated company and would be a “relevant disposal” for the purposes of the Act.

SLC solicitors have recently been involved in a case where a landlord company transferred a qualifying property to an individual “on trust” for an associated company and argued that this met the exemption criteria.  Unfortunately the case settled before being tested at court. However, if the landlord has an associated company available to it, then it would seem a safer option to transfer the property directly to that company, rather than risk reliance on the provisions of a trust to ensure that the transaction fell within the exemption to the Act.

A landlord who does not comply with the requirements of the Act commits a criminal offence and is subject to a Level 5 fine on conviction. The tenants’ remedy is to compel the new landlord to transfer the property to them for the same terms as the original sale – including the purchase price -and time only starts to run from when the tenants became aware that the RFR applied to the transaction.

The purchaser of a freehold property where RFR is likely to apply should therefore insist on evidence that RFR has been complied with and serve notice on the tenants as soon as possible stating that RFR applied to the transaction  or risk being compelled to give up the property to the tenants later.

If you would like advice on the Right of First Refusal please contact Leanne Donoghue, Property Solicitor at SLC Solicitors:  lmd@slcsolicitors.com.

Costs and Unreasonable Conduct in the First Tier Tribunal (Property Chamber)

In Willow Court Management Company (1985) Ltd v Alexander [2016] UKUT 290 (LC) the Upper Tribunal (Lands Chamber) (UT) gave guidance on Rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013. In three conjoined appeals the UT considered, for the first time, how the Tribunal should exercise its discretion to award costs pursuant to Rule 13 and in particular when costs should be awarded where a party has acted unreasonably in bringing, defending or conducting proceedings.

In each of the appeals the First-tier Tribunal (FTT) had found unreasonable behaviour and awarded costs pursuant to Rule 13(1)(b). In Willow Court Management Company (1985) Ltd v Alexander, the management company had not properly implemented the contractual procedure for determining the service charge, notwithstanding this having been explained in previous tribunal decisions. The FTT found this to have been unreasonable and Mrs Alexander was awarded £13,095 plus VAT as a contribution towards her costs.

In Sinclair v 231 Sussex Gardens Right to Manage Ltd, the FTT found that Miss Sinclair had behaved unreasonably by failing to pay her service charges, defending herself on what was considered to be spurious grounds, unsupported by sufficient evidence, and in general, behaving unreasonably. She had been ordered to pay £16,800 towards the costs incurred by the right to manage (RTM) company.

In Stone v 54 Hogarth Road London SW5 Management Ltd, Mr Stone had withdrawn his application for a determination of the service charge shortly before it was due to be heard by the FTT. The FTT was satisfied that he had had reasonable grounds for commencing his application but nevertheless considered that he had acted unreasonably in not withdrawing the application at an earlier stage, after concessions had been made by the landlord and when fewer costs would have been incurred. Mr Stone was ordered to pay £2,260.80 towards the costs incurred by his landlord.

The UT allowed all three appeals (setting aside the order for costs in each case), stating that the standard of behaviour expected of parties in tribunal proceedings ought not to be set at an unrealistic level. The Tribunal then proceeded on giving general guidance on how the tribunal should approach Rule 13 applications.

The UT held that when exercising any power under the 2013 Rules, the tribunal had to give effect to the overriding objective, namely dealing with cases justly and fairly. The UT set out a three stage test:-

Firstly, the tribunal must first assess (as an value judgment and not as the exercise of its discretion) whether the conduct complained of is objectively “unreasonable”.;

Secondly, if the conduct meets the “unreasonable test” threshold, the tribunal must consider whether, in the exercise of its discretion, and taking account of all relevant factors, it is appropriate to make a cost order.

Thirdly, if the tribunal considered that it is appropriate to award costs the tribunal must, as a further exercise of discretion, consider the form and quantum of the costs award.

The UT stressed that each case would turn on its own facts. However, “rule 13(1)(a) and (b) should both be reserved for the clearest cases and that in every case it will be for the party claiming costs to satisfy the burden of demonstrating that the other party’s conduct has been unreasonable”.

The UT held expressly that a party does not have to show “causation”; thus a party would not have to establish a causal nexus between the costs incurred and the behaviour to be sanctioned.

The UT held that the standard of reasonable conduct between represented parties and unrepresented parties would differ, recognising that legal advice was often only available at a disproportionate cost to litigants in the tribunal.

The behaviour of an unrepresented party with no legal knowledge should be judged by the standards of a reasonable person who does not have legal advice. The fact that a party “acts without legal advice” is therefore relevant at the first stage of the inquiry. This may also be relevant, to a lesser extent, in the second and third stages.

Parties, especially unrepresented parties, should be assisted to make sensible concessions and abandon less important points, or where appropriate, their entire claim. Such behaviour should not be discouraged by the fear that it will be treated as an admission that the abandoned issues were unsustainable and ought never to have been raised (and thus would arguably be justification for a claim for costs).

In a more recent case, Matier v Christchurch Gardens (Epsom) Ltd [2017] UKUT 56 (LC), the Upper Tribunal (UT) considered whether to uphold a cost order under rule 13(1)(b) of the Property Chamber Rules 2013 (Rule 13) against a litigant in person (M) on the basis that he acted unreasonably in conducting proceedings.

The First-tier Tribunal (FTT) determined proceedings between M and M’s landlord (C) concerning payment of a service charge. It then granted C a cost order against M under Rule 13 on the basis that M had acted unreasonably in conducting proceedings by:

The UT upheld the costs order. In doing so, it was heavily influenced by M’s failure to follow the FTT’s directions about the preparation of submissions and hearing bundles. The UT held that:

The UT made clear that similar cases will turn on their facts. It noted that where a litigant in person acts in good faith in their defence (even if misconceived), this would rarely amount to unreasonable conduct. However, this case is a powerful reminder to litigants that acting inconsistently with tribunal directions may lead to an adverse costs order.

For more information, or to discuss in more detail, contact Jeremy Weaver on 0333 0300 200 or email jpw@slcsolicitors.com.

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