So, you’ve been living in your flat for a while now, perhaps paying a little ground rent and service charges or more likely, paying nothing at all. Nevertheless, you start to notice that the building is looking a little bit shabby. Flaking paint here and there, the odd leak, stained carpets, cracks in the walls; you think, it’s probably time someone did something about that.
Of course, you immediately try to find the freeholder’s contact details; it must be on one of those documents you got when you bought the flat, right!? Sure, there it is. You call the telephone number, no answer. Send an email, no response. Write to him, and nothing! It’s not long before you realise you have an absent freeholder and panic sets in. So, what now?
Discovering that you have an absent freeholder can be alarming for so many reasons. How will the building get essential repairs and maintenance? Where has your service charge money gone? How will you extend your lease? Or even, how can you proceed with Collective Enfranchisement to purchase the freehold? Furthermore, leaseholders may have extreme difficulty selling their property as many mortgage companies are unwilling to lend on properties where a freeholder is not fulfilling his responsibilities.
While you and the other leaseholders may decide to take on the freeholders’ responsibilities by organising the repairs and maintenance as required and keeping insurance premiums up to date, there’s only so much that you can do from a legal standpoint; and you certainly can’t enforce any covenants in the lease. Most notably, however, you will not be able to grant lease extensions, which are crucial for maintaining the security and value of your property. It’s also unlikely that your efforts will do any favours for anyone attempting to sell their property.
Fortunately, there are a few solutions that can help you to put an end to this potential nightmare.
Purchase Absent freeholder indemnity insurance
Absent freeholder indemnity insurance will provide financial protection should the absentee freeholder reappear. You might be wondering how this could possibly affect you adversely but if you haven’t been abiding by the terms of your lease, you could be in trouble. Why? Because the freeholder has every right to enforce covenants in the lease on his return. This can include issuing backdated ground rent demands for up to six years of unpaid rent or imposing financial penalties for alterations made to the building without permission.
Therefore, if you and the other leaseholders have been keeping on top of repairs and maintenance to the building and as a result, have altered any of the common parts such as the roof or windows, you may be ordered to compensate the freeholder. Having absent freeholder indemnity insurance in place would thus cover you for such unfortunate occurrences.
Further benefit can be experienced when selling a leasehold property, as mortgage lenders are more likely to lend on an absent freeholder property if suitable indemnity insurance is in place. In fact, a lender considering offering a mortgage on such a property is likely to insist that this specialist insurance is arranged. However, there are still some lenders who will simply refuse a mortgage in these circumstances, as they deem properties with absent freeholders to be insecure investments.
Absent freeholder indemnity insurance is typically available for a few hundred pounds, which leaseholders would bear the cost of equally.
Common risks covered include:
- Losses arising as a consequence of action taken (including rights of re-entry) in respect of arrears of rent/service charge,
- Failure to comply with assignment conditions,
- Breach of covenants in the lease in relation to works carried out to the property
Apply for a Vesting Order
Under the Leasehold Reform, Housing and Urban Development Act 1993, leaseholders can apply for a Vesting Order to either purchase the freehold or to obtain a lease extension. The application must be made to the County Court, which will determine whether or not to grant the order. As a prerequisite, leaseholders must be able to demonstrate to the Court that they have attempted to locate the absentee freeholder using reasonable means.
It is critical that leaseholders exhaust all means of tracing an absentee freeholder, as the Vesting Order can be withdrawn at any time during the proceedings should the freeholder be located. If this happens, leaseholders could potentially face losing thousands in court and legal fees.
If leaseholders are applying for a Vesting Order in order to purchase the freehold, all leaseholders in the building are required to be in agreement and provide their consent. Unfortunately, there could be challenges here as some leaseholders may not wish to take on the responsibilities of owning and managing a freehold. However, if all leaseholders do agree, are eligible, and have satisfied the Court’s requirements to locate the absentee freeholder, the Vesting Order may be granted.
Where a County Court grants a Vesting Order, the power of freeholder will be vested in the Court. In other words, the Court will assume responsibility for the absentee freeholder, and act on their behalf. When this occurs, the Court will typically refer the case to the First-Tier Tribunal in order to determine the premium payable to purchase the freehold or extend a lease.
When purchasing a freehold under a Vesting Order, leaseholders will pay the market of value of the freehold interest. However, the premium will not be subject to ‘marriage value’, which can significantly reduce the cost of the freehold in cases where there are low leases. Though, a percentage of this Marriage Value may be paid by leaseholders as ‘Hope Value’ to reflect the price an investor may apportion to such an interest.
The premium must be paid to the Court, who will keep hold of it on behalf of the absentee landlord until such date as they can be found. Leaseholders may also have to pay any sums outstanding to the freeholder or any other fees the Tribunal requires to be paid in connection with the grant of the new lease. Furthermore, many leaseholders will have instructed solicitors to act on their behalf, presenting an additional cost to the proceedings. As such, a Vesting Order can be an expensive process, costing thousands in total.
Acquire the freehold under Section 33
Under Section 33 of the Landlord and Tenant Act 1987, leaseholders can acquire the freehold when the freeholder is in breach of his obligations under the leases in the building. For example, if a freeholder is responsible for repairs and maintenance of a building in accordance with the leases, and his absence means that this obligation is not fulfilled, the freeholder will be in breach.
If the court is satisfied that the freeholder cannot be found and the lessee has taken reasonable steps to find him, they will usually grant an order enabling the leaseholder to acquire the freehold interest. As with a Vesting Order, the court will represent the absent freeholder and appoint a valuer to determine the premium payable by the leaseholders for the acquisition.
Leaseholders may pay a lower premium for the freehold under Section 33 of the Landlord and Tenant Act 1987 compared to the price payable under the Leasehold Reform, Housing and Urban Development Act 1993. Furthermore, you have a better opportunity of recovering a higher proportion of costs from the amounts payable for the interest.
Apply for the Right to Manage
Under the Commonhold and Leasehold Reform Act 2002, leaseholders can apply for the Right to Manage their building. This statutory process transfers the management responsibilities from the freeholder to a Right to Manage company owned by the leaseholders. Right to Manage can be exercised by leaseholders no matter whether the freeholder is absent or not. Furthermore, it does not require an order of the court, the freeholder’s consent, or the outright purchase of the freehold.
Thus, this solution to having an absent freeholder can be much more cost-effective and simpler to achieve compared with the above actions. Leaseholders would only need to pay the £100 application fee to the First-Tier Tribunal plus any other professional fees running up to the process.
How to locate an absent freeholder
Regardless of whether you have indemnity insurance in place or whether you’re heading to court, it’s always best to locate the freeholder. Your first port of call should always be the freehold title. This is a legal document that contains the freeholder’s name and contact details amongst various information regarding the freehold. You should have been given a copy of this when you purchased your flat or you may be able to obtain it from the solicitor who acted on your behalf. Failing that, you can request a copy of the title document from Land Registry for £3.
Once you have the freeholder’s contact details, and an attempt to contact him has not been successful, you should send a formal notice to his last known address, asking him to provide up-to-date contact details. It’s crucial that you keep a record of this formal notice and postage receipts, as this will stand you in good stead for Vesting Order and other court proceedings.
If possible, you could attempt to go to the freeholder’s last known address to see if you can make contact, or even to make enquiries into his whereabouts. It’s important that you take a witness with you should you decide to do this, as not only will they be able to testify your account to the courts, it will be prudent from a safety perspective.
It’s also worth checking with all leaseholders to see if any management companies have been involved with the building in the past, or perhaps solicitors who have dealt with previous property transactions in the building; as you may find that they are able to provide you with contact details for the absentee freeholder. Alternatively, a specialist tracing agent could be employed to locate the absentee freeholder, although success cannot be guaranteed.
Your research may reveal that the freehold is owned by someone who is an undischarged bankrupt, or the freehold is in the name of a company that is in liquidation or administration. In which case, it may be possible to serve a notice on the trustee in bankruptcy, or the administrator of that company who can deal with the request.
While some of these activities may seem excessive, if you’re going to court it will be up to you to prove that you have made sufficient effort to locate the absent freeholder and that you haven’t had any success. These efforts should be continued for between three and six months to demonstrate a reasonable effort to locate the missing freeholder.
What happens if you find out the freeholder has died?
If you discover that your freeholder has passed away, it’s likely that his estate would have been passed to a new freeholder as inheritance through a valid will or through the rules of intestacy. If there was a will, the legal executors or administrators are obliged to inform the new freeholder of their asset so that they can assume responsibility.
However, if the freeholder has died intestate and with no next of kin (or if the company owning the freehold has been dissolved), the freehold will often vest in the Crown under the rules of bona vacantia or ‘ownerless property’. In cases like this, leaseholders may be able to purchase the freehold from the Crown through the Treasury Solicitor.