We are a self-managing freehold company with 11 lessees, each one with an equal share in the Company. Some time ago, one of the properties changed ownership. We have been trying to establish and receive formal confirmation for some time. We have been seeking:
- A Notice of Assignment and if appropriate, Mortgage
- Executed Deed of Covenant
- Surrendered Share Certificate (from an existing shareholder, but former lessee/owner of the the property)
Having originally sought advice from our own solicitor, we have sent letters to (who we believe) is still the mortgage provider, the managing agent of the property and the solicitor involved in the ownership transfer of the property. However, we still have not been able to resolve the issues – either paperwork is not forthcoming or inaccurate. As a result, the company paperwork is not complete.
We are unsure what our next steps should be, apart from contacting each party again.
Should we formally engage our solicitor in an attempt to finally put closure on the situation? (Obviously this will come at some cost, and one we are keen to avoid.)
We assume it is impossible to transfer shares to any prospective new owner, if the current owner does not have shares in the company – have shares in his/her name?
We wonder if this issue is unique to us, or whether it has happened elsewhere, and wonder how it was resolved.
If you could provide any advice on the issue, it would be most appreciated.
The FPRA replies:
If you are trying to keep your documentation in good order, it is frustrating when others will not co-operate. It also does not make a good start, when a new leaseholder begins by ignoring the terms of the lease.
The failure to transfer the shares may be the aspect of this problem which can most easily be solved, though this will depend upon the content of your Articles of Association. Most well-drawn Articles which are designed for the use of Residents’ Management Companies contain special provisions which (a) state that only someone who owns a lease may be a member of the company; (b) provide that, on ceasing to own a lease, a leaseholder can no longer own shares in the company; and (c) give power to the directors to resolve to cancel the shares of someone who no longer owns a lease. Check your Articles of Association. You may well find provisions to this effect. If not, then you should amend your Articles, by a Special Resolution (75% majority, on 21 days’ notice) either at an EGM, or, more conveniently, at your next AGM. You may come across suitable provisions in a precedent, or you may prefer to get your solicitor to draft them. Any changes in the Articles should enable you to put right even things which had gone wrong already.
This will in fact only partly solve the problem, as it will enable you to make sure that the previous leaseholder no longer owns this block of shares, and that they are available to be re-issued to any new owner, but as far as the present owner is concerned I am not aware of any provision enabling a company to force someone to become a member without signing something to that effect. Again, if your lease was set up with the expectation that there would be an RMC, you may find a provision whereby a leaseholder covenants to takes shares in the RMC and thereby to become a member of the company. If this is the case then you may be able to proceed as for the other breaches (below).
One point which you should appreciate is that, even if the new leaseholder fails to sign a Deed of Covenant, he is still strictly bound by all the provisions of the lease. This is because of the doctrine of “privity of estate”, which in essence says that, where there is a lease, the landlord for the time being can enforce the leaseholder’s covenants against the leaseholder for the time being, and vice versa. In most respects, therefore, having a Deed of Covenant is redundant. It does however mean that:
(a) signing the Deed of Covenant brings home to the new leaseholder that he is bound by the terms of the lease. To this extent it can be a useful exercise; and
(b) it also means that (on the basis of the way leases often require these Deeds to be drafted), the new leaseholder remains liable on the covenants in the lease even after he has assigned the lease to someone else, and so becomes, in effect, a guarantor for the rest of the life of the lease. I suspect that this is an unintended consequence in most cases.
(I should perhaps add here that I presume your leases are still those granted in or around 1982 – I have checked some previous correspondence with you. If the leases were granted after 1995 the law is now different. Leaseholders for the time being remain liable on their covenants, and the same applies to landlords, but, in my view, the effect of the 1995 Act is that a landlord under a lease granted after 1995 cannot insist on new leaseholders entering into a Deed of Covenant with the landlord, and any provisions to that effect are void. This is because (a) leaseholders are already bound by the general law and (b) it is not in general possible to make leaseholders liable on the lease after they have assigned it. One still does see such provisions, however, in leases. I am unsure as to whether Solicitors have included these provisions unthinkingly by force of habit, or there is some factor here that I have overlooked).
So, to recapitulate:
(a) there will be a provision in the lease requiring a new leaseholder to give notice of assignment to the landlord;
(b) there may be a provision in the lease requiring a new leaseholder to take shares in the RMC (though this is dependent upon the lease being tightly drafted, and it being expected that there would be an RMC when the lease was originally drafted); and
(c) there may be a provision in the lease requiring a new leaseholder to enter into a Deed of Covenant (though this is, in my view, valid only if the lease was granted before 1996).
Essentially, any of these obligations which are contained in a lease may be enforced in the same way as any other lease obligations. You could therefore take proceedings in the County Court as a small claim for an Order for Specific Performance of these covenants (An Order for “SP” is like an Injunction, but is an order to perform a contractual obligation). The usual rules about “no costs” with small claims would apply, except that you could claim up to £260 for preliminary legal advice, as the claim was for “SP”).
The chances are that the leaseholder will put matters right before it even gets to Court, but if it got there and the leaseholder then ignored the Order you could get a solicitor to serve a Notice on him under s.146 of the Law of Property Act 1925, which is a Notice warning a leaseholder that he is in breach of the terms of his lease, and that the next step will be that the landlord will commence court proceedings to forfeit the lease. The terms of your leases almost certainly will include a provision that a leaseholder has to pay the costs of a s.146 Notice (even if the leaseholder puts things right and no court proceedings have to be brought). Court proceedings for forfeiture will always need the advice of a solicitor, and will never be treated as a small claim, so a landlord will always be able to claim costs. The result of a forfeiture order (which would almost certainly be suspended so as to give the leaseholder a final chance to comply) would be that the leaseholder would lose his lease without compensation, so forfeiture proceedings, or even a s.146 Notice, is likely to concentrate the mind of even the most obdurate leaseholder.
Until the Commonhold and Leasehold Reform Act 2002 a ground landlord could have proceeded directly to a s.146 Notice for an alleged breach of the terms of a lease, but now the breach must be proved first. The 2002 Act envisages that the usual way to do this would be for a landlord to take make a separate application to a Leasehold Valuation Tribunal under s 168(4) of the Act for a determination that there has been a breach. This is an application that you could well make in person, and the “no costs” rule normally applies before tribunals, but, the determination could only be enforced by following it up with a s. 146 Notice. Applying to the County Court for an order of SP seems to me to be the better bet.
I have had a look at the Lease website which has details of LVTs’ determinations under s.168(4) CLRA 2002 (http://www.lease-advice.org/decisions/other/s168table.htm) and it is interesting that the very first two cases reported there seem to deal with problems very similar to yours. As they were straightforward, both were dealt with by written representations, i.e. there was no need for a tribunal hearing.
I am sorry that this reply has gone on rather long, however, I hope it covers all the points. I have occasionally come across similar problems before, and have offered similar advice, though I do not know whether those members acted upon it or how effective it was in practice.