How a legal loophole allows British builders to transfer the ownership of flats into hands of hidden investors
LONDON – A few words in a law designed to protect homeowners appear to have been used by major housebuilders to sell off freehold rights to investors, leaving the ultimate ownership of flats in the hands of hidden investors. The Landlord and Tenant Act 1987 was introduced to protect homeowners from soaring service charges and unfair leasehold practices.
The Business Insider website reports that the right of first refusal is easily worked around by developers and gives a few examples.
The article by Thomas Colson shows how it is perfectly legal for developers to hold the freehold of a block of flats in an associated company and simply sell that vehicle on to ground rent speculators.
It cites the example Persimmon Group (No 3) Limited registered on July 14 2009, as an associated company of Persimmon. On November 19 2014 it was re-named Adriatic Land 2 and its single share ownership transferred to Adriatic Land 2 Limited.
In common with all Adriatic Land freehold owning companies the ultimate beneficial ownership is hidden behind nominee directors of the private wealth management firm Sanne Group, based in London and Guernsey.
The Adriatic Land freeholds are managed by the Long Harbour group of William Waldorf Astor, heir to the viscountcy (and half-brother-in-law of former Prime Minister David Cameron).
Mutiple homeowners have reported having the ownership of freeholds on their homes transferred to the network of Adriatic Land companies without their prior knowledge.
Mr Colson writes:
“Business Insider asked Persimmon if the associated company was registered for the purpose of selling freeholds without first offering tenants the Right of First Refusal, but it did not respond to a request for comment by the time of publication.”
The article then considered Seaton Group SPV 5, Bellway XI, and Bellway XII, all registered to Bellway, a FTSE 250-listed builder, between April 2009 and April 2013.
They were subsequently re-named Adriatic Land Group 6 (GR1), Adriatic Land 3 (GR1), and Adriatic Land Group 4 (GR1) and their ownership was subsequently transferred to Adriatic Land.
“Business Insider also asked Bellway if the associated company was registered for the purpose of selling freeholds without first offering tenants the “right of first refusal”, but it had not responded to a request for comment at the time of publication.”
Emily Fitzpatrick, a solicitor with Hart Brown solicitors (which is also quoted making leaseholder-friendly comments in the Commons Library report), tells Business Insider:
“In my experience developers and non-developer landlords who were correctly advised were certainly circumventing the obligation to offer freeholds to leaseholders in this way.”
She added that developers contracting “with a third party, often a regular ground rent investor, before any of the flats have been sold” is now the more common work-around.
This is also LKP’s experience.
“This means when they come to complete the sale of the freehold to the third party, the Act does not apply because the developers are obliged to sell the freehold under a pre-existing contract,” says Miss Fitzpatrick.
If you want to reform leasehold, this is how you could do it
In an LKP Westminster all-party round-table meeting for MPs in January 2015, Philip Rainey QC referred to the 1987 Act as “one of the most ill-drafted pieces of legislation ever inflicted on us”.
He added: “Now that we have collective enfranchisement, lease extension rights for all flats and no-fault Right to Manage, the right of first refusal is in principle redundant.”
LKP is quite surprised that the dukes of Westminster and Buccleuch commercial interests, and possibly Native Land, did not take steps to avoid right of first refusal at the prime London site Neo Bankside, where the freehold is currently on sale for £4.8 million.
Neo Bankside leaseholders offered freehold for £4.8m, but have eight weeks to agree deal
Some vendors of freeholds to avoid the time delay in Section 5 notices create individual head leases over each of the flats in the block. This step is not a relevant disposal under the Act.
They then sell the freehold and because of the head lease they do not have to offer the freehold to the lessees because it is no longer their immediate landlord. The head lease over each of the flats is their immediate landlord
The following day they then sell the individual head lease and because there is only one lessee under each of the head leases they do not have to offer the right of first refusal
Clearly it breaches the spirit of the Act but whether it would ever be challenged in Court is very much up to the Local Authority who is supposed to take up such matters..
Stephen, then of course comes the issue of freeholders/developers creating a tri- party lease, naming a connected managing agent as part of the lease. This allows the managing agent to exploit the leaseholders charging exorbitant amounts in exchange for very poor service and also allows the managing agent to pass “earnings” to the freeholder, who can use those profits to finance the loans taken out to purchase the freeholds in the first place.
Put simply, in the coming months, all “loopholes” must be closed in this sordid unregulated industry.
However, for the avoidance of doubt, there is large scale criminal abuse of existing legislation by a small unregulated predatory group of individuals and companies through the illegal disposal of Ground Rent Portfolios. This pernicious trade specifically relates to freehold residential premises constructed during the 1970/80/90s. and takes place without the prior knowledge of leaseholders. A large number of flats in such premises consist of 99 year leases, ensuring the flat owner will require an extension in the near future..
Yes, the law does at present provide that freehold titles may be legitimately transferred from one company to another associated with the same company (e.g. ABC No 1 Ltd to ABC No. 2 Ltd) and there indeed may be sound reasons why this is.so.
And it goes like this:
(1) Form the associated company..
(11) Transfer the land to the associated company.
(111) transfer the shares in the associated company (now holding the freehold title) to the purchaser.
However, when a landlord enters into an agreement with an unrelated buyer to transfer the land in the title to an associated company conditional on the purchase of the share|(s) in the associated company, then the resultant sale transaction to the unrelated buyer is a calculated and criminal breach of the provisions of the LTA 1987 (as amended by the Housing Act 1996).
In other words, and Olly, Stephen, and ME please take note, the land in the title has not been transferred to the associated company and will not be until such time as the freehold title purchase monies have been secured.. This usually is in the form of a Share Agreement alongside a concurrent (same day) Freehold Title Agreement., where the terms of each agreement are clearly interdependent.
(this is where the seller acts as a fiduciary for the buyer and therefore the transfer is not to an associated company).
And you may be very sure, when two totally unrelated companies (individuals) enter into such an agreement, the seller is not going to transfer the land in the title until such time as the purchase monies have been secured. – particularly in this industry where the parties know each other full well!
And you may also be assured both seller and buyer will go to every available length to evade section 11A of the LTA 1987 to provide copies of the contract (s) – itself a criminal breach of the LTA 1987.
Which is why you must inspect the contract documents and if necessary enforce the right to same through application in the County Court.
Musty dash out, however, I will extract the appropriate clauses from a Share Sale Agreement and concurrent Property Sale (Title) Agreement. and post to this site as fast as can.
You are correct and to be fair to me I have been posting for years as to how easy it was to get around the Right To First Refusal legislation be selling the company that owns the freeholds rather than the freeholds themselves. This goes to explain just why there are so many derivatives on the name Adriatic or Fairhold for example? If you want to pass on a freehold without” bothering” the leaseholders you simply sell Adriatic (no 4 GR) Topco 2016.
Further to above, I quote verbatim from the following Share Sale Agreement and have named the parties for illustrative purposes as follows : ABC No 1 Ltd, ABC No 2 Ltd, ABC No 3 Ltd.
Between ABC No I Ltd and Unrelated Purchaser (“the Buyer”) relating to the sale and purchase of the whole of the issued share capital of………ABC No 3 Ltd
E On the terms hereinafter appearing the Seller (ABC No 1 Ltd) has agreed to sell the shares to the Buyer. (Unrelated Purchaser) subject to:
“Consideration” the consideration payable by the Buyer to the Seller for the Shares as set out …
“Intra Group Debts” means the debts of £…………………………………..owed by the Target to……………….in respect of the transfer .to the Target of certain of the properties. (from the Seller)
“Target” in the Share Sale Agreement means ABC No 3 Ltd (which is also the named Buyer in the “even date” Property Sale Agreement – the Ground Rent portfolio). The Buyer in the Share Sale Agreement being the Unrelated Purchaser.
“Property Sale Agreement” means an agreement of even date made between ABC No i Ltd, ABC No 2 Ltd and the Buyer (ABC No 3 Ltd in the property sale agreement). and known as the Ground Rent Portfolio.
“Title Indemnity Policy” means an Indemnity Insurance Policy in the sum of (the full purchase price in the Property Ground Rent portfolio Sale Agreement) with ABC No 3 Ltd being the insured party “in the Agreed Form”.
Clause 4 COMPLETION:
Completion of the purchase of the Share shall take place at the offices of the Seller’s solicitors on the Completion date.
4.2 On completion the Seller shall deliver to the Buyer (the Unrelated Purchaser)
(A) a duly executed transfer of the Share
(D) . the Title Indemnity Policy
(F) undertaking from the Sellers solicitors to the Buyers solicitors in the “Agreed Form” relating to the completion of the Applications. (…that is to the Land Registry)
(H) a receipt from ABC No 1 Ltd and ABC No 2 Ltd (to the Buyer – the Unrelated Purchaser) in respect of payment of the “Intra Group Debts” subject to receipt of the value of the “Intra Group” Debts” from the Buyer (the Unrelated Purchaser) in accordance with clause 4.5
Upon completion of the matters referred to in clauses 4.2 to 4.4 the Buyer (Unrelated Purchaser) will pay the balance of the Consideration and procure that ABC No 3 Ltd (as Buyer -Unrelated Purchaser now owns the share) repays the “Intra Group Debts” to the Sellers solicitors.
Now if you can get your head round all that, it confirms there never was any transfer to an associated company and transfers of the Share and of the Title occurred only when the price for the freehold titles to the premises had first been secured by the seller and as set out in Clause 4.5 of the Share Sale Agreement).
And that is how gullible and unsuspecting leaseholders have been and continue to be criminally fleeced.