As I commented previously in Leasehold Reform News (see the article mentioned elsewhere on this site) the decision in Kelton Court is of interest to any long leasehold flat owners with property outside of Prime Central London (PCL) who are looking to either purchase their freehold or extend their lease.

Why?

Essentially, because a 6 percent deferment rate was decided upon in a departure from the standard 5% rate in Sportelli. The Lands Tribunal came to this decision for three reasons; the enhanced risk of obsolescence, the percieved lesser rate of growth outside PCL and the enhanced ‘management risk’ associated with flats.

A higher deferment rate, of course reduces the amount that the flat owners will have to pay as part of the calculation.

Does this affect all property outside PCL?

Not necessarily. Whilst two of the factors, (obselescence and growth rate) are features of any property outside PCL the combined effect of which is to take the deferment rate 5.25%, the enhanced management risk will only be a feature of properties where the landlord is directly responsible for the management. Where there is a head lease, or the leases are fully repairing the ‘management issue’ does not arise and the most the flat owners can argue for is therefore likely to be 5.25%.

Management issues

The focus on management as an issue is interesting as in reaching this decision the Lands Tribunal looked at evidence of the increased use of the LVT’s service charge jurisdiciton (411 cases in 2007 compared to 232 in 2005 and 27 in 2004). The interesting point is that is that the numbers mentioned relate to applications to the London LVT. Perhaps a better comparable might have been the regional LVT ?

Developments since Kelton Court

Since Kelton Court, we have the decision in Ashdown Hove, (Ashdown Hove Limited v Remstar Properties Limited [2010] 37 EG 138) in which 6% was achieved for a block in Hove, the enhanced risk of management being argued for successfully despite their being a management company that was a party to the leases.

The point being made (successfully) that where the lease contains an obligation on the landlord to take on the management company’s obligations in the event of its failure, there is still a risk to the landlord that it may have to be involved in the ‘day to day’ management of the property and that this will therefore ‘taint’ the amount that an investor would pay for the landlord’s interest.

Conclusions

We are now at the point where outside PCL valuers will normally be arguing for 5.25% and if possible, more based on the arguments concerning management. The decision in Ashdown Hove is an LVT decision and arguably slightly unique for a number of reasons. Therefore it may be that Lands Tribunal will need to comment further before there is any greater certainty in this area.

Mark Chick

17.11.2010

This note (being very general in its nature) is not a complete statement of the law in this area.  It is therefore not a substitute for legal advice from a suitably qualified professional and should not be relied upon as such. No liability can therefore be accepted for any actions based on reliance upon it.

If you require legal advice please visit www.bishopandsewell.co.uk

As reported today on the BBC News Website (and elsewhere) it appears that the heady world of Leasehold Reform has not entirely escaped the government’s attention in the current spending review.

There are two announcements relevant to those interested in this sector.

Firstly, it seems that the Residential Property Tribunal Service (RPTS) is to be amalgamated into the Ministry of Justice (MoJ).

Whilst this might ultimately be part of the wider legislative scheme envisaged by the Tribunal Courts and Enforcement Act 2007 of harmonising all tribunals eventually into one ‘unified’ service, this change is probably quicker than the LVT itself would have liked.

On the table for discussion must surely be the question of hearing fees, a unified set of procedural rules and closer harmony with the other “Lower Tier” Tribunals. Whether this is in the long term interests of ‘consumers’ of these services remains to be seen.

Any enhanced procedural rules are only likely to drive up costs for those subject to them and hopefully common sense will prevail so that any changes are not too significant.

As to hearing fees, whilst perhaps these are an inevitability, I for one would like to see these introduced on a tiered basis related to value so that there is no effective deterrent to access to justice for lower value cases which are either of general importance, or which genuinely merit a hearing because of the obstinance of one of the parties.

Perhaps the controversial question of whether the LVT should have a more significant costs jurisdiction, (including perhaps the power to decide that one of the parties should pay any hearing fee) will also have to be considered.

As to the second annoncement, it seems that LEASE, the non-governmental organistion set up to advise on the Leasehold Reform legislation and which provides a free advice service is to be amalgamated into another government body. More precise details are awaited in the formal announcements.

Whilst consumer awareness in this sector has improved (as has the quality of service provision itself), there is still a need for the promotion of access to information and education concerning this sector.

Mark Chick

What is the smallest enfranchiseable part of a building ? – Craftrule Considered – Craftrule Limited v 41-60 Albert Palace Mansions (Freehold) Limited [2010] EWHC 1230 (Ch)

The Leasehold Reform Housing and Urban Development Act 1993 (as amended) (‘the 1993 Act’) gives long leasehold flat owners the right to purchase the freehold to their building, provided that they act collectively and in accordance with the procedures set down in the 1993 Act.

In order to exercise the right 50% or more of the qualifying tenants in that part of a property to which the claim is made must act collectively. A question therefore arises on the investigation (or instigation) of a claim as to how many of the flat owners in a particular part of the property are taking part in the claim and whether their number is sufficient.

Section 3 of the 1993 Act provides that the right to claim the freehold applies to any premises that are a ‘self-contained part of a building’ and contain at least two flats held by qualifying tenants. ((A qualifying tenant is a flat owner who owns a lease that was originally granted for a term of at least 21 years.)) Of the flats in that part of the building at least 2/3 must be qualifying tenants.

In assessing whether premises form a ‘self-contained part of a building’ the test is that this part must be a vertical division of the building and structure such that the relevant part could be developed independently of the remainder of the building and the ‘relevant services’ ((services provided by means of pipes cables or other fixed installations)) required for that part of the building are provided independently or could be provided without significant interruption in the provision of such services to occupiers of the remainder of the building.

Whilst there have been previous decisions on what constitutes a self-contained part of a building ((See in particular the case of Oakdwood Court (Holland Park) Limited v Daejan Properties Limited [2007] 1 EGLR 121.)) the point arising in Craftrule has not been considered before. Craftrule is an important decision as it shows that a wider interpretation will apply when assessing the ‘part of a building’ and counting the number of qualifying tenants within it.

In Craftrule the participating tenants chose to serve a notice in respect of a building divided in two halves, both of which it was accepted on the facts were capable of independent redevelopment. The distribution of qualifying tenants between both halves was uneven, such that one half of the building would not have qualified in its own right if the tenants there had served a notice in respect of that part. However a combined claim was made counting the total number of participating flats in each of the two halves of the whole building to reach the qualifying number.

The tenants’ initial notice was challenged by the landlords at first instance and the tenants then appealed to the High Court.

The High Court found in favour of the tenants, accepting an argument advanced by their counsel that the provisions of section 3(1) relating to the building does not require those seeking to exercise their rights under Chapter I of the 1993 Act to select the smallest ‘enfranchiseable unit’ when formulating their claim. Rather, where there are various sections in a building it is open to those initiating the claim to select the division of the property that they are seeking to enfranchise and to then establish a qualifying number in that part.

Comment

The decision in Craftrule is important as it means when assessing how many flats are in a particular part of a block to count in a qualifying number for the purposes of a claim to the freehold the flat owners no longer have to serve a notice in respect of each of the smallest ‘enfranchiseable’ units in the building. Rather, if the structure of the building is similar to that in Craftrule two adjacent units may be counted together provided that this united structure is a self-contained building.

Another intriguing possibility (as mentioned by James Driscoll in his recent article in the Estates Gazette) is the possibility that if a building is enfranchised in a condition where there are separate sub-units which are enfranchiseable in their own right, is that there is nothing to stop the flat owners in these smaller units bringing a further claim to the freehold in respect of their ‘part’ of the building at a later date. Although in practice whether such subdivision would be practical or desireable remains to be seen.

There is also the possibility of a further appeal by the landlords in this case. So as ever, it is a case of ‘watch this space’.

Mark Chick

5th October 2010

This note (being very general in its nature) is not a complete statement of the law in this area.  It is therefore not a substitute for legal advice from a suitably qualified professional and should not be relied upon as such. No liability can therefore be accepted for any actions based on reliance upon it.

If you require legal advice please visit www.bishopandsewell.co.uk

For those of us that attended the Reigate valuers’ forum on Thursday 17th June there was an interesting dialogue concerning the impact of the service charge legislation on valuation for leasehold reform purposes in the post Kelton Court environment.

Whilst it appears that the principle of an enhanced ‘management risk’ associated with flats could give rise to an increase in the appropiate risk premium and hence the deferment rate, those circumstances where this would not be appropriate were also discussed.

The presence of headlease clearly negates some of the ‘management headache’ assciated with this asset class, but what about the situation where the Right to Manage (RTM) has been exercised ?

In this situation the landlord (arguably) has a reduced management burden – although this of course assumes a well-run RTM company. If the landlord has to exercise his powers to compel the company to comply with its obligations this will not be the case.

Similarly, if the RTM company has the right to place the insurance then arguably one of the motivating factors associated with owning a ground rent is also diminished. So the question then arises as to whether the one cancels the other out.

I expect that in practice the particular property will need to be examined to see which of the following factors are present and are likely to be of significance in arguing for a departure from the Sportelli deferment rate of 5% for flats. Briefly, these seem to be:-

1. Whether there is a headlesse in place (with management responsibility).

2. Whether there is a ‘third party’ management company (a party to the leases and with all the flat owners as members) and with the power to set the service charge.

3. Whether the Right to Manage has been exercised.

4. In the case of a small block (usually two flats) whether the leases impose a full repairing obligation on the flat owners (i.e. Where there is no service charge).

I would be interested to know what other practitioners think.

Mark Chick

22.06.2010