by Amanda Lawrence
It is now over a year since Part I of the Landlord and Tenant Act 1987 came into effect, bringing in the controversial “right to buy” for tenants of privately owned flats. Landlords proposing to dispose of the freehold of a block of flats must now offer it first to the tenants, if a sufficient majority qualify under the Act. Only if the tenants do not accept the offer within the specified period can the landlord sell the property to his chosen purchaser, at a price not lower than that offered to the tenants, and within one year of the end of the acceptance period.
The procedure to be followed inevitably slows down the sale process and involves landlords in burdensome administration; the Act prescribes no penalties as such for failure to comply. However, there is an anti-avoidance provision. The tenants of a defaulting landlord can require their new landlord (the purchaser) to sell the property to them at the same price. Therefore, failure by the vendor to comply with the pre-emption procedure in the Act results in a potential risk to the purchaser.
The recent case of Cousins v Metropolitan Guarantee Ltd (reported at p 56 of this issue) graphically reminds us that this risk can become a reality. In this case, a decision of a leasehold valuation tribunal (alias the London Rent Assessment Panel) and the first decision on the 1987 Act, not only did the tenants succeed in requiring the purchaser to sell the property to them but, owing to an unfortunate quirk of circumstances, the purchaser also ended up theoretically out of pocket to the tune of £18,250.
The facts were that the landlords of a terraced house divided into five flats sold the reversion to Metropolitan Guarantee Ltd at auction for £140,750. The vendors failed to give the tenants of the house the opportunity to exercise their pre-emption rights first. Furthermore, certain of the flats in the property were wrongly described in the auction particulars, and it was admitted that the misdescription had affected the price.
If a landlord disposes of the reversion of property in contravention of the procedure laid down in the Act, under section 11 the tenants can serve a notice on the purchaser requiring him to provide them with details of the date, price and terms of the sale. Under section 12, the requisite majority of qualifying tenants can then serve a “purchase notice” requiring the purchaser to sell the property to their nominated representative on the same terms including price. Under section 12(3)(b) the purchase notice may, instead of specifying particular terms, provide that the terms of the sale are to be determined by a rent assessment committee (to be known for the purpose as a leasehold valuation tribunal), which has power under section 13 of the Act to determine any question arising out of a purchase notice. This is what the tenants in this case did. They then made an application for the committee to settle the terms of the sale, including the price, and submitted that the price to be paid was actually something over half of the price originally paid by Metropolitan at auction.
The argument in the case centred on the question of valuation. To cut a long story short, the tribunal decided that its jurisdiction to determine the terms of the sale under section 13 did not include power to value the property afresh as the tenants had contended, and that it probably did not have power to inquire into the genuineness or otherwise of the auction price. However, as the property now to be sold to the tenants was “not precisely the same” as the property offered for sale to Metropolitan (because of the admitted misdescription), the tribunal did have jurisdiction to adjust the price to take account of the misdescription and to adjudicate on the size of the reduction. In the event, the parties agreed between themselves on a reduction of £18,250, and the sale to the tenants presumably proceeded on that basis. No doubt Metropolitan would have taken steps to recover the shortfall from the original landlords.
From the point of view of valuation, this was obviously a case decided on its own particular facts. Nevertheless, it is apparently the first instance of the tenants of a residential block forcing the purchaser from a defaulting landlord to sell the reversion to themselves.
Purchasers of residential investment property should take note. It is vital that the vendor satisfies the purchaser that either the tenants of the property do not qualify under the Act or the procedure laid down by the Act has been followed and the rights of the tenants have been exhausted. Alternatively, if the vendor wishes to proceed quickly without going through the pre-emption procedure, the purchaser must be satisfied that reasonable arrangements for indemnity and compensation are in place in case the tenants subsequently choose to exercise their rights.
There is some small comfort for purchasers and vendors; the tenants’ right to force a sale is limited in time. The purchase notice must be served on the new landlord within three months of the date of service by the landlord of a notice containing information requested by the tenants under section 11 or, when no section 11 notice is served, within three months of the tenants’ being formally notified of the sale. In order to exercise their rights, tenants must be able to organise themselves to take the decision to contest the landlord’s sale, nominate a representative, and serve a purchase notice, all within a fairly short space of time. The cases where tenants are willing and able to do this are likely to remain the exception rather than the rule. Nevertheless, the case of Cousins v Metropolitan Guarantee Ltd is a timely reminder for all parties that failure to take account of the 1987 Act can have very real consequences.
