Striking a balance

Gary Murphy and Patrick Kerr look at the remedies that resolve difficulties in the Landlord and Tenant Act 1987. Gary Murphy and Patrick Kerr are partners at Allsopp & Co. The Landlord and Tenant Act 1987, as originally drafted, provides that, where a buyer has been nominated to represent the qualifying tenants, the landlord is prohibited from disposing of his interest to anyone other than this buyer for three months.

If no person is nominated to represent the tenants during the specified period, or they tell the landlord that they do not wish to proceed, the landlord may then dispose of his or her interest.

The problem is that the landlord cannot sell for less than the sum specified in his original offer notice to the tenants. Set too high a price and you risk making the interest difficult to sell. Set it too low and the tenants get a bargain at less than market value. Precise valuation is essential.

A fundamental failing of the 1987 Act is that there are no sanctions for non-compliance and its provisions were therefore largely ignored.

Schedule 6 of the Housing Act 1996 sets out an alternative procedure to the private treaty route of the 1987 Act: sale by auction.

Where the landlord proposes to make a relevant disposal by auction, notice must be served between four and six months before the date of the auction. The notice constitutes an offer by the landlord to the tenants for the auction contract to have effect as if a buyer nominated by the tenants had signed the auction contract rather than the successful bidder. The tenants have at least two months to accept this offer and a further 28 days to nominate a buyer.

If the tenants do not nominate a person to represent them or inform the landlord they do not wish to proceed with the acquisition, the landlord may then dispose of his interest at auction.

A person nominated by the tenant must elect, at least 28 days before the auction, that the provisions of Schedule 6 will apply. If this is done and the property submitted to auction, the landlord must, within seven days of the sale at auction, send a copy of the contract to the nominated person who then has 28 days to accept. If he accepts the contract, he, in effect, becomes the buyer. Completion of the sale cannot take place less than 28 days after the day on which the nominated buyer is deemed to have entered into the auction contract.

Section 91 of the Housing Act 1996 provides that the landlord has committed an offence if, without reasonable excuse, he makes a relevant disposal without having first served notice under s5 of the Landlord and Tenant Act 1987.

By taking the auction route, there is no longer an absolute requirement for the landlord to fix an asking price. The figure will be determined by the market in the auction room.

Where a landlord proposes to sell an estate or interest in more than one building he must sever the transaction to deal with each building separately for the purposes of service of s5 notices. The word “building” is not defined.

These provisions have resulted in difficulties where, for example, two or more separate blocks of flats sharing communal gardens and so on are to be sold. If the tenants of one block wish to buy but the tenants of the other do not, mutual rights of access and enjoyment would need to be reserved. Who would own these common areas?

Severance of buildings in accordance with the legislation may give rise to problems connected with severance of the price where the landlord seeks to dispose of the portfolio by private treaty. It is up to the seller to set a reasonable price within his offer notice for each building in the portfolio.

Further problems might arise where the landlord is seeking to dispose of a ground lease. If the consent of the freeholder is needed, the 1996 Act provides that the landlord “shall use his best endeavours” to secure that consent. He should even go so far as to institute proceedings if he feels that consent is being withheld unreasonably.

If the freeholder is entitled to enforce an alienation clause which prohibits any assignment, he may only be prepared to grant consent to assign if a sufficiently attractive premium is offered. Here, it would probably be sufficient for the landlord simply to ask for consent. If it were not forthcoming, it is unlikely that the tenants could reasonably expect the landlord to negotiate on price.

Prior to the imposition of criminal sanctions, landlords who followed the required procedure were effectively disadvantaged compared with those who ignored it.

Today, there is no choice. The playing field has been levelled. The professional advisor's position is far more comfortable. Landlords are in no doubt as to what is expected of them and tenants can now be reasonably certain that their rights will be respected.

The auction market for qualifying residential investments remains strong even in cases where the tenants are (metaphorically) waiting on the steps of the auction room to confiscate the buyer's contract.

A number of uncertainties, mostly procedural, remain. However, on the whole a balance between landlord and tenant has finally been achieved. All we need now is a consolidating statute.