Landlord and Tenant Act 1987 Part III: Missing or Neglectful Landlords – A Cheaper Way to Capture the Freehold

Most surveyors and solicitors practicing in the leasehold property sector will be familiar with the rights of lessees to obtain their freehold either by way of a collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993, or (in the event of a disposal by the landlord) by electing to the collective Right of First Refusal under Part I of the Landlord and Tenant Act 1987.

Less widely known, perhaps due to how infrequently the legislation is enacted, is the possibility of acquiring the freehold by virtue of Part III of the Landlord and Tenant Act 1987, which provides for an Acquisition Order to be made by the County Court in instances where the landlord is in breach of his management obligations. As we shall see, where participating tenants’ leases have unexpired terms of less than 80 years, this can result in a much better deal for lessees than an enfranchisement claim under the 1993 Act.

An Acquisition Order under Part III if the 1987 Act can be made by the court where either;

• the landlord is in breach of any obligation to repair, maintain, insure, or manage the property; or
• at the date when the application to the court is made, and for the two years preceding that date, there has been in force an appointment of a manager for the property under Part II of the 1987 Act; and
• in either of the above instances the court considers and Acquisition Order appropriate given the circumstances of the case.

The legislation applies to buildings containing two or more flats, and at least two thirds of the lessees need to participate in the claim. Generally, lessees will be eligible to participate if the original term off their lease was for 21 or more years. Buildings which are more than 50% non-residential are excluded.

The primary difference between the basis of valuation under the 1993 Act and the 1987 Act is in the treatment of ‘marriage value’. Marriage value is essentially the increase in the aggregate value of the interests in the property arising from the fact that, on acquisition of the freehold, the participating lessees are free to grant themselves new leases without any restriction as to the length of term. Where a claim is made under the 1993 Act 50% of marriage value is payable to the landlord in respect of participating tenants’ leases which have unexpired terms of less than 80 years. Marriage value tends to be a significant proportion of the final premium payable, especially where the participating lessees have shorter leases.

Under the 1987 Act, however, the compensation due is simply the market value of the freehold interest. There is no mention of marriage value, and any potential ‘overbid’ made by a lessee is explicitly excluded. Whilst this might seem like a sure-fire way to sidestep marriage value altogether, in recent cases (ex: Arrowgame Ltd. v Wildsmith 2012) the First Tier Tribunal has determined that ‘hope value in respect of marriage value’ is payable, based on the idea that a purchaser would increase their bid in the hope of, at some point in the future, receiving claims for new leases under the 1993 Act. In the case of Trustees of the Sloan Stanley Estate v Charles Carney-Morgan & John Matthew Stephenson 2011 (a case decided under the 1993 Act, where hope value in respect of marriage value is payable in respect of non-participating lessee’s), the Upper Tribunal (upheld by the Court of Appeal) determined hope value at 10% of overall marriage value for leases with unexpired terms of 70.25 years, and 20% of overall marriage value for leases with unexpired terms of 4.74 years. Adopting Carney-Morgan as a guide it can be concluded that, where marriage value is a consideration, acquiring the freehold under the 1987 Act ought to in all cases be significantly cheaper than collectively enfranchising under the 1993 Act.

As of writing, we are dealing with a case where, following our valuation advice, the client is in the process of applying for and Acquisition Order under the 1987 Act. The property in question comprises two flats held on 65 year leases. The freeholder (being absent) has failed to perform any of their management function for a number of years. In this instance, our estimation of the premium payable under the 1993 Act is £79,000, and under the 1987 Act £52,000, representing an estimated saving of £27,000 (over 34%).

There is a greater evidential threshold to overcome than under the 1993 Act (which provides a non-fault-based right). Furthermore, the lessees will need sound legal advice on likely outcome of their claim, as if the landlord successfully resists an application, a court order for costs could be made against the participating lessees. However, the savings in the premium can be significant, and in cases where a management order is in place, the landlord is in serious breach of obligations, or the landlord is absent altogether an application under the 1987 Act is worthy of serious consideration.

If you are considering acquiring the freehold to your building good professional advice is a prerequisite first step. Our specialist Chartered Surveyors have a deep knowledge and extensive experience of the valuation procedures and applicable legislation. You can contact the team on 020 7183 2578 or by email.