It is recognised that commercial property transactions are not all free of the entanglements of leasehold reform, particularly with mixed-use development, and when grappling with the question: “Is it a house?”
What seems to be less in the collective mind is section 19(4) of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”). This provides that where, immediately before a notice is given by a group of leaseholders claiming the freehold under section 13 of the 1993 Act (“initial notice”), a contract is in force for the disposal to any extent by the freeholder of the whole or part of the specified premises, or by any other relevant landlord, of any interest of his falling within section 19(2)(a) or (b) of the 1993 Act (ie freehold of the specified premises, appurtenant property or property used by a qualifying tenant in common, etc), the operation of the disposal contract is suspended so far as it relates to any such disposal.
The ramifications of such an event, if unexpected, could be reasonably grotesque. The suspension of the contract lasts for so long as the initial notice remains in force. What if contracts are exchanged for the sale of a large portfolio of commercial properties, some of which include flats whose owners claim their freehold post-exchange?
A portfolio may make sense commercially as a coherent whole, but not with bits missing. What would a prospective lender do; and what if the contractual buyer was back-to-backing the contract? The second contract would not be suspended under the 1993 Act.
If, in due course, a binding contract is entered into with the flat-owners, in consequence of the initial notice, then (without prejudice to the law of frustration) the freeholder, any other relevant landlord and all other persons will be discharged from further performance of the suspended contract so far as it relates to the disposal.
A contractual solution
All this can be avoided simply by providing in the sale contract for the eventuality of an initial notice being given (section 19(6) of the 1993 Act) in relation to the whole or part of the property. The use of wording specifically to avoid section 19(4) being visited on unsuspecting parties does not seem to be widespread.
For instance, the Standard Commercial Property Conditions of Sale (Second Edition) (currently under review) are silent as to what would happen in the event mentioned above, even though there is a section specifically dealing with “Reversionary interests in flats”.
The Common Auction Conditions (Edition 3) make no reference to the possibility of an auction contract being suspended. Even if Edition 4 of these conditions, anticipated to be published soon at the time of writing, remains silent, this is understandable to some extent considering that one size cannot be forced to fit all. But there are practically no situations where it will be in a client’s interest to be in contractual limbo, locked into an agreement which is wholly or partly suspended indefinitely.
The risk that needs to be managed is of receiving an initial notice when none was contemplated by the parties to the contract. The default position should always be to state, expressly, in any contract which is even remotely susceptible to an initial notice, what will happen if an initial notice is given, even if the statement is simply that the contract shall be unaffected by sections 19(4) and (5).
A similar approach to houses would be prudent. Terms broadly comparable to the above, but providing for the immediate discharge of any landlord’s prior relevant contract, apply in the event of an effective notice of tenant’s claim being given in relation to a house, under section 5(7) of the Leasehold Reform Act 1967, if the contract does not provide for the eventuality of a tenant’s notice of claim being given.
The emergence of CGT
These provisions seem to have been in the shadows. A different aspect of leasehold reform which may come into the limelight, due to tax changes, is the wording of new leases under section 56 of the 1993 Act.
When a new lease is granted under the 1993 Act, the old lease is deemed to be surrendered and is replaced by the new one. So there is a disposal which is potentially hit by capital gains tax (“CGT”).
The impact of CGT on leaseholders who claim a new lease under the 1993 Act has not hitherto generally been an issue. Prior to 6 April 2013, CGT would only be relevant for UK resident leaseholders for whom a flat was not their principal private residence. However, since 6 April 2013, CGT has caught certain residential properties held by non-resident companies and since 6 April 2015 any residential property held by non-UK residents is potentially liable to CGT. So the CGT net is wider.
Another reason why CGT has not been a commonplace issue when applying for a new lease under the 1993 Act is that HM Revenue & Customs has granted an extra-statutory concession (D39) to the effect that the surrender of a lease before its expiry and the grant of a new one for a longer term will not be regarded as a disposal of the old lease where the transaction is made on certain terms. These include the condition that the terms of the new lease, other than its duration and the amount of rent, do not differ from those of the old. “Trivial differences” are ignored.
Strictly speaking, the terms of a new lease under the 1993 Act should differ from the old because the 1993 Act requires specific new provisions to be introduced, such as the immediate landlord’s right to obtain possession on grounds of redevelopment (section 57(7)(b) of the 1993 Act). An increased incidence of CGT being potentially payable may have a far-reaching “Heath Robinson” effect, highlighting the need to reconcile the form of a new lease with the concession.
John Spencer-Silver is head of prime residential at Gowling WLG
