The landlord of Discovery Docklands East, opposite Canary Wharf, has scored a spectacular own goal that has trashed the open market value of his freehold by £600,000 – and landed himself with £30-40,000 in legal costs.
The game-playing began when the landlord sought to sell the freehold, but first had to offer it – under law – to the qualifying leaseholders.
A mere two months – the statutary minimum – were set aside for them to organise themselves, raise the cash and appoint solicitors.
If they managed it, the leaseholders would be able to buy the freehold for around £500,000, although the open market value is closer to £1.1 million – based on Allsop freehold valuations of 18-24 times ground rent incomes.
Needless to say, the freehold owners Fedamore Limited and Admirals Way Nominee 2 Limited – both registered in a tax haven, this time Jersey – assumed the leaseholders would not manage the transaction in time.
That was a catastrophic mistake, it now emerges.
Discovery Docklands East, built in 2004, is a block of 192 flats opposite Canary Wharf that used to be the former Daily Telegraph office blown up by the IRA in 1996.
More pertinent, it is now stuffed with investment bankers, many of whom have made the block their home, have young children and have formed a community.
They spend their professional lives concocting or unpicking deals of this sort and immediately smelled a rat.
Leaseholders were informed that the freehold was for sale on February 27 and were given a deadline of May 6 to conclude the deal.
“All this offer did was galvanise the residents, 30 or 40 of whom got together and understood that they had to buy the freehold,” says resident Pamela Sen-Gupta, a City solicitor.
Needless to say, the freeholder declined to assist the residents in passing on contact information for their neighbours. (A section 11 request under the Leasehold Reform Housing & Urban Development Act 1993.) This was formally declined by City law firm Olswang, for the freeholder.
In fact, it made not the slightest difference, thanks to the universality of social media.
“We tracked down leaseholders across the globe, many of whom had not a clue what the freehold offer actually meant.
“Within remarkably short time we had acquired more than 50 per cent of the qualifying leaseholders on board.”
Solicitors were appointed and the cash was ready. But only six days before the deadline, on April 30, the freeholder withdrew the offer to sell.
But this was no surprise at all to the leaseholders (who pay tribute to the help given by the Leasehold Knowledge Partnership and its network of residents groups in Docklands).
“We had assumed all along that once they had realised that we were serious, they would withdraw the offer,” says Pamela. “But doing this so late in the day was really not smart. The freeholder now has to pay our £30-40,000 legal costs.”
If the process now incentivises the residents to seek the right to manage and acquisition of the freehold, it would be no surprise.
Furthermore, the freeholder cannot sell the freehold for a year, and if there are attempts to transfer the asset by selling the holding companies that is not likely to look good in court.
It is thought the freeholder is yet another debt-encumbered Irish entity.
If so, that means there may be some explaining to do to Ireland’s National Asset Management Agency, which has the task of liquidating property assets returned to Irish banks after the boom went bust.
Olswang rejects the obligation of the landlord to share leaseholder contact information:
And here Olswang withdraw the freehold sale offer:
Always ALWAYS buy the freehold
The rule for leaseholders is: buy the freehold if it is offered to you for sale.
Otherwise, it will be sold to someone else for a profit.
Buying the freehold will likely to reduce service charges, gives leaseholders control of the management and increases the value of their homes.
But freehold owners – developers in the first instance – are highly reluctant to offer the freehold to the leaseholders. Instead, they want to sell it on the open market for far more than its ground rent income would warrant. Those who buy these assets see them as something to be monetised.
Leaseholders have the “right of first refusal” to buy the freehold in part 1 of the Landlord and Tenant Act 1987.
But it is easy to get round this requirement and developers have long done so.
In spite of complaints by LKP, and campaigners such as Baroness Gardner, Parliament has done nothing to close this glaring loophole.
The case of Discovery Docklands East demonstrates why the law needs to change.
The 1987 Act is widely recognised as flawed. In 2010, Lord Neuberger, then Master of the Rolls, described it as one of the most badly drafted laws on the statute books.
So long as the freehold is bundled up in a company and the company itself is sold rather than the freehold itself, there is no requirement to offer it to the leaseholders.
So, with a very modest amount of pre-planning, developers can circumvent the right of first refusal requirement.
Why this right exists has never been clear.
Philip Rainey QC, a leading landlord and tenant authority, discussed the 1987 Act at the LKP briefing in Westminster as one of the areas of leasehold law requiring reform.
Indeed, he felt the time was right to abolish Part 1 of the 1987 Act and simply amend the enfranchisement law.
Why do landlords not want to apply the right of first refusal?
The short answer is money. The open market value of these assets is far higher.
Auction data shows the open market is willing to pay up to 24 times the ground rent for a freehold reversion. This is much more than the courts would set under an enfranchisement sale.
(Enfranchisement, whereby leaseholders can compulsorily purchase the property of someone else, may prompt other thoughts: should such a thing exist in English law? If this is essential to make leasehold tenure fair, isn’t the answer to end leasehold?)
Why are freehold purchasers willing to pay more?
Because of something Vincent Tchenguiz once described “embedded optionality”.
Vincent explains how he purchased a building let to the Department of Social Security for £9 million and then sold on the rights to just the rental income for £13million.
A reversionary investor may see many opportunities in a site: an income from the roof space, the sale of wayleaves (eg consent for, say, cables in common areas), insurance commissions and approvals (eg for leaseholders knocking out walls, re-working bathrooms etc).
Take a look at this example of a leasehold game-playing opportunist who bought a freehold to 24 flats in Kettering for £68,000 and dreamed up £756,000 in major works on which he would take a declared 10 per cent commission.
The tribunal here reduced the major works by £600,000.
Other curiosities in the 1987 Act
For some mysterious reason the 1987 Act declares that the landlord only needs to serve a notice of right of first refusal to “not less than 90 per cent of the qualifying tenants”.
Why does it not have to be offered to all leaseholders?
Leaseholders have to get the support of not less than 50 per cent of all qualifying leaseholders – and the figure includes that 10 per cent, who may or may not have received the notification of sale from the landlord.
Leaseholders may not know their neighbours or have any representative body. The landlord does not have an obligation under the Act to disclose who those leaseholders are.
Given that the landlord can sell the freehold at a much higher price on the open market, it is not in his interest to co-operate with leaseholders eager to buy it.
The Act then imposes a minimum time limit for the sale to conclude the purchase of only two months.
This is almost impossible on any large site, and the residents at Discovery Docklands East are to be congratulated for being so quick off the mark. Especially as they had no active representative body.
The landlord’s solicitors, the City firm Olswang, have repeatedly declined to provide contact information for other leaseholders, or to pass on information received from leaseholders who wanted to participate in the purchase.
On April 8 the leaseholders wrote to Olswang demanding details of their fellow leaseholders, making clear they were aware of their rights under s11 of the Leasehold Reform Housing and Urban Redevelopment Act 1993.
In a letter dated April 13, Olswang asserted that s11 does not provide any rights for leaseholder information with three “in the alternative” arguments of why they would not provide this data.
The government, on the other hand, clearly does expect landlords to pass on contact information to leaseholders seeking to form recognised tenants’ associations:
Page 14 it states: “Getting information from landlords about service charge payers
“Some concern has been raised that obtaining information from landlords or property managers about service charge payers to be able to meet the guidelines for the recognition of an association is sometimes difficult.
“Information is already obtainable by exercising other rights such as section 11 of the Leasehold Reform Housing and Urban Development Act 1993.”
The Leasehold Knowledge Partnership informed Olswang that its refusal to co-operate would be considered at a meeting organised by LKP about recognised tenants associations where government officials were due to attend.
There was no acknowledgement from Olswang.
So, while it could be argued that the landlord was always obliged to provide information under s11 of the Leasehold Reform Housing and Urban Redevelopment Act 1993, Olswang declined to engage.
Early in the process, LKP advised the leaseholders not to rely on the landlord or his solicitors to assist (and in our view comply with the law).
Instead, we suggested that they obtain copies of the owner’s details from the Land Registry.
Thanks to the ubiquity of social media the residents could then track down the other leaseholders. Fine in dealing with a block of flats of professionals, but likely to be less effective at, say, a retirement block.
Explaining to some owners why they should buy something that they thought they might already own was not easy: at all social levels ignorance about leasehold tenure of flats in England is widespread.
It is a form of tenure unique to this country (and Wales); the rest of the world has commonhold tenure systems.
What happens next at Discovery Docklands East?
Just for once the landlord may not get what he wants.
He now cannot sell the site for a year, having been obliged to withdraw their offer from sale.
Over the next 12 months the landlord may find that the leaseholders have taken him to court a number of times – over service charges, over right to manage and over an acquisition order for the freehold.
Having fired up the leaseholders, and tried to be clever, they are in an admirably combative mood.
The withdrawal of the freehold for sale once it was clear the leaseholders would be capable of buying it was widely anticipated.
This particular freehold may now not be worth nearly as much as the landlord hoped when he began this process.
What next for Government?
LKP has long argued that leasehold law has many serious defects that make the market inefficient, while government has repeatedly and wrongly claimed that there is balance in the law.
Discovery Docklands East, and many other cases have shown there is no “balance” in part I of the 87 Act.
The same sort of problem applies to leaseholders’ right to manage, what was intended as a simple, no-fault system.
Smart-alec barristers have made a mini-industry out of subverting RTM.
LKP does not advocate yet another law to add to the layer upon layer of leasehold reforms in 2013, 2008, 2002, 1996, 1993, 1988, 1987, 1985 … 1925.
Government needs to scrap the complex and contradictory laws of English leasehold law to end the farcical way we own and manage flats in this country.
All development and management companies that operate over the border in Scotland, where leasehold has never existed, concede that it is a far more harmonious system.