THE MARSHALL & GALPIN GUIDE FOR TENANTS BUYING BLOCKS OF FLATS UNDER THE LANDLORD & TENANT ACT 1987
NOTES RELATING TO THE PURCHASE OF A FREEHOLD OF A PREMISES
COMPRISING TWO OR MORE TENANCIES LET ON A LONG LEASE
UNDER THE LANDLORD AND TENANT ACT 1987
INTRODUCTION
If you are a tenant of a flat, the Landlord & Tenant Act 1987 (the 1987 Act) may apply if your landlord wants to sell the freehold of the building. There are certain landlords who are exempt from the requirements, such as local authorities and registered social landlords and the rules do not apply in certain circumstances where the landlord is resident in the building.
LEGAL REQUIREMENTS
Provided that there is not an exempt landlord and provided that the resident landlord exemption does not apply, the landlord must if he wishes to dispose of the freehold of a building in which there are flats first offer the freehold to the tenants of those flats. If he does not do so he commits a criminal offence.
Again there are rules as to whether a tenant is a qualifying tenant for these purposes, but effectively anybody who owns a long leasehold interest in a flat will qualify, with very few exceptions.
PROCEDURE
The procedure is that the landlord serves a Notice on all of the qualifying tenants. The Notice has to contain the following information:-
1. The details of the property that is being sold and the money that the landlord wants for the sale.
2. The fact that it constitutes an offer by the landlord to dispose of the property.
3. An acceptance period which must be not less than two months after the Notice is served during which the offer can be accepted.
4. A further period, again being not less than two months within which persons may be nominated to buy the premises.
The time limits in the 1987 Act are strict. If at least 50% of the tenants who qualify don’t reply within the two month period or, if having replied they don’t nominate who is going to buy the premises within the further two month period, the landlord is then free to dispose of the premises on the same terms as offered to the tenants at any time during the next twelve months.
TENANT PROCEDURES
How the tenants respond depends very much upon the constitution of the building. The larger the building the more likely it is that there is a management company to which the tenants belong. On receipt of the Notice, the management company should co-ordinate a meeting with all of the qualifying tenants to decide whether they wish to accept the landlord’s offer or not. The offer can be challenged if the sum for which the block is offered is too high and the management company should take all appropriate advice from surveyors concerning the offer price. If there is no management company, the tenants themselves will have to liaise and go through the same procedures.
It is obviously better to go through to the landlord with a collective response, and if the decision is that the tenants wish to acquire the freehold it is important that a majority of the tenants respond to the Notice within the appropriate time. At this stage it is only necessary to confirm the acceptance of the landlord’s offer.
Once the appropriate responses have been sent to the landlord to secure the rights of the tenants to buy the building, there is then a further period of two months in which the tenants can nominate to the landlord who the buyer is going to be. If there is already a management company set up to run the building, it would be normal for the management company to buy the building. If there is no management company set up, the two month period allows the tenants the time to set one up and to nominate that management company as the purchaser. It is normally sensible to have a company who buys the block rather than having the block bought by individuals. The company that is formed to buy the block must, of course, be set up as a management company rather than a general trading company.
Once the notification has been given to the landlord as to who the buyer is going to be, the solicitors for the landlord will then produce the title to the property, and arrangements will be made for the transfer of the property into the name of the nominated buyer, for the payment of the money over to the landlord, and effectively the matter will be dealt with as a normal conveyancing process.
RESULTS
The results of the purchase will be:-
1. That whatever responsibilities the landlord had under the lease will now pass to the nominated buyer and, assuming the lease is properly drafted, the nominated buyer will be able to enforce the tenants’ obligations under the leases and, assuming that it is a management company who has bought it that is comprised of the tenants, effectively the tenants take responsibility for whatever the landlords used to do.
2. The follow on from taking over the landlord’s responsibilities is the tenants get their own choice as to who does work to the premises, who insures the premises, etc. and can, of course, negotiate their own prices for doing that.
3. One of the major benefits of the tenants becoming their own landlords is that it is open to them to make changes to the provisions of the lease. There are some leases which were prepared some time ago and either clauses within them or clauses that are omitted do not now comply with the Mortgage Lenders Handbook. The tenants can vary the leases to avoid these problems. They can also – because effectively they have become the owners – cancel payment of ground rent and avoid any problems that may arise in the future with their flats by extending the length of the leases so that they remain mortgageable.
4. Any provisions of the lease which required the landlord’s consent and which may have required the payment of fees to the landlord’s solicitors can now be dealt with by the tenants themselves effectively with their own legal advice, and they can negotiate themselves the prices that they are charged for that legal advice.
5. As owners of the freehold, the tenants will control all the land surrounding the block and therefore if anybody else wants rights over that land, or if anybody else wants to purchase any part of that land, the tenants will be the freehold owners and able to decide on that and take the benefit of any proceeds.
In summary, there are a considerable amount of advantages for tenants becoming their own landlords and even if they do not feel capable themselves of running the management of the block it is perfectly possible for them to appoint managing agents whose fees the tenants will be able to negotiate and who can deal with the running of the block.
FREQUENTLY ASKED QUESTIONS
1. What if all the tenants do not want to join in the purchase?
As long as at least 50% of the qualifying tenants respond to the landlord they are able to proceed with the purchase. If there is no formal management company they will simply set up a management company with the amount of shares that correspond to the amount of qualifying flats in the block, but they will only issue shares to people who have contributed towards the purchase. They will get all the benefits outlined above. The people who don’t join in will continue to pay ground rent and will continue to have the same leases, but their landlords will now be the residents who have clubbed together to buy the building.
2. How can we be sure that people who have promised to join in the purchase eventually come up with the money?
It is quite possible to have an agreement prepared between all of the tenants who are joining in, which effectively nominates somebody to deal with the purchase on their behalf, nominates solicitors who will deal with the purchase on their behalf, nominates surveyors who will deal with the purchase on their behalf and confirms that they will produce the appropriate funds when required. The larger the block and the more qualifying tenants, the more likely it is that such an agreement is necessary. Without it those who want to press ahead run the risk of having to find additional funds to compensate for the people who have not produced them. It would be sensible, before committing anybody, to establish a fund, so that effectively before committing to the purchase you know that all the funds are there to enable it to proceed.
3. If there is no current management company, what do we do?
Because the procedures under the 1987 Act are so important, it is essential that you obtain legal advice as quickly as possible, and that advice should come from one solicitor representing all of the tenants, and one person in the block should be nominated to deal with that solicitor and should be authorised to incur costs with that solicitor in accordance with the agreement that has been entered into. The solicitor will only want one channel of communication. The solicitor will be able to arrange for the formation of the management company and deal with the formal response to the Notices. It is important that the management company is set up correctly.
4. What happens to those people who have not joined in the original purchase?
As previously mentioned, they remain as tenants but their landlord changes from their original landlord to the new landlord nominated by the residents, and their leases continue in exactly the same way. They will not benefit from the cancellation of the ground rent, nor will they be able to require their leases to be extended other than by payment of the normal premiums and fees that the previous landlord would have been able to charge. They can become part of the management company that has bought the building by buying a share in that management company and the normal fee charged for the share is their share of the costs of having acquired the freehold. If, for example, the total costs of acquiring the freehold including fees amounts to £60,000.00 and there is a block of 10 flats, only 6 of whom have contributed, they will each have expended £10,000.00. If a 7th flat decides to join in, his contribution will be £8,571.00, ie. 1/7 of £60,000.00, and that figure will be divided equally between the 6 who were the original purchasers.
5. What if the tenants, having discussed it, decide that they either can’t afford it or don’t want to go ahead with it?
The landlord has 12 months in which to dispose of the freehold on the same terms as he offered it to the tenants. If he does dispose of the freehold within that 12 month period, the tenants will simply have a new landlord, and their leases and the payment of rent etc will continue as before. If he doesn’t manage to dispose of the freehold within 12 months, then if he chooses to sell the freehold he must go through the 1987 Act procedures again from scratch..
6. Can the tenants initiate this process themselves?
Not under the 1987 Act. That Act is purely to cover disposals of the freehold by the landlord and it is the landlord’s decision to dispose of the freehold that triggers the operation of the Act. The Leasehold Reform Housing and Urban Development Act 1993 does, however, contain provisions where the tenants can initiate the procedures and that Act also contains the provisions which allow the tenants individually to apply to the landlord to have their leases extended.
7. What happens if the landlord doesn’t comply with the 1987 Act?
As mentioned, he commits a criminal offence, but as long as the tenants know that he has either sold the freehold or attempted to sell the freehold without first offering it to the tenants, there are procedures under the 1987 Act which effectively allow the tenants to compulsorily purchase the block from the person who has just bought it. There are time limits during which this must occur. The tenants should be assisted in this by the fact that the Landlord & Tenant Act 1985 requires any change of landlord to be notified to the tenants.
Please note that this represents the law as at 16th February 2007. No action should be taken without legal advice and assistance and no responsibility is taken for any action that may be taken in reliance on these notes
For further information please contact:
James Barnatt (Oxford) 01865 268644 email - mailto:james.barnatt@marshallgalpin.com
Offices In Oxford, Abingdon and Thame
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