Disposals under Section 5 of the Landlord and Tenant Act 1987

 

In relation to Tenants’ rights to acquire their Landlord’s interest under Section 1 of the Landlord and Tenant Act 1987

The framework of this legislation obliges the Landlord to offer to Tenants of qualifying buildings, the right to acquire the freehold when the Landlord decides to sell.

The legislation is complicated and not well drafted.  However, the spirit of the Act is that the Landlord is obliged to serve a Notice on the Tenants prior to any disposal, allowing Tenants two months in which to accept the offer.  This neither obliges the Landlord nor the Tenant to proceed.

Having accepted the offer, Tenants then have two months in which to nominate the purchaser (usually a company incorporated especially for that purpose owned by the participating Tenants) and then in effect, a further month in which to complete the purchase.

At least 51% of the Tenants in a building must accept the offer.  This does not mean that those 51% need to provide the funding as that can be provided by the remaining Tenants or even outside the group.

It follows therefore, that there is no change, in effect, in the present arrangements when Tenants purchase.  The freehold changes hands to the company which they have shares in and they continue paying ground rent and service charge to the Company precisely in the existing way (unless they agree to change that).

What however, distinguishes the participating Tenants from those who do not participate, is that the participating Tenants have the right to vary, extend or alter the Leases to suit themselves as well as the right to waive the ground rent.  So especially where the Lease is less than say 80 years in length, there is a considerable advantage in exercising the right to buy.  This is because for no further payment, Tenants who participate can agree to extend the Leases of their own flats whilst expecting those who do not participate to pay the proper price for exercising a Lease extension (the Law governs the price which Tenants have to pay for that).

The company is run by a Board of Directors who need not be all of the participating Tenants (but often are, in a small building).  The Directors are usually chosen by all the Tenants and are elected annually.  They determine how the company is run and who is responsible for managing the building.  Costs can be saved because there is no further need to use outside managers (although many Tenants choose to do so).  Unusually but not always, buying the freehold enables the Tenants to also run the management themselves.
The advantages and disadvantages can be summarised as follows:-

Advantages

1. Tenants have control of the building

2. Tenants own an investment in a company which has an appreciating asset and thus when selling a flat, often it is more attractive to a buyer to have an interest in the freehold and to help in the management.

3. Tenants can manage the building themselves (but do not need to do so) and so save costs.

4. Tenants can vary, extend or otherwise alter their Leases (with some exceptions) so that their Leases are saleable (should there be any defects) and in particular, are of a sufficient length to allow market sale.

5. Many Tenants are more comfortable having a Landlord in which then have a financial interest and so can influence management style, as often there is dissatisfaction in the way that flats are managed by Landlords or their agents.

6. Tenants can arrange their own insurance of the block, often thus saving money and retaining commission which the Landlord would otherwise keep as well as saving money on the actual management.

7. The cost of acquiring the freehold should not be substantially more than the cost if Tenants exercise their right to acquire the freehold under the Commonhold and Leasehold Reform Act 1993.

Disadvantages

1. Some Tenants find the concept of managing the building a worrying one and do not wish to have the extra responsibility (although those who find this usually ask outside agents to manage the building, which at least enables them to contract on their own terms rather than their Landlord’s terms).

2. Where Leases are in excess of say 90 years, some people would argue that there is no point in acquiring an additional Lease term at that stage.

3. The process is a complicated and expert procedure requiring time to be devoted by those pursuing the concept as well as ongoing care.  When Tenants leave it can sometimes be difficult to find another person to take on the responsibility of management (although there are many organisations around who will help).

4. Once the freehold has been purchased, it is difficult to reverse the situation.  However, there is a strong market for freehold ground rents of this type and once participating Tenants have extended their Leases, there is no reason why a sale of the freehold onwards should not be possible.

5. Tenants now have a “no fault” right to manage qualifying buildings so buying the freehold is not necessary to acquire the right to manage.

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