QUESTION
I have commenced court proceedings against my freeholder for breach of the repairing covenant and I am requesting damages for my out of pocket expenses – which includes loss of rental income. The freeholder phoned me out the blue the other night and threatened that unless I drop my court proceedings, he will sell on the freehold at auction. I of course gave my freeholder short shrift and reminded him that he would have to follow due process in any disposal of the freehold e.g. serve a Section 5B notice offering right of first refusal to the lessees before being able to offer the freehold for auction sale. As courts can be notoriously slow in giving out hearing dates, I am afraid that even if my freeholder were to follow due process, he may have time to dispose of the freehold before I am granted a hearing and awarded damages against him.
My questions are these:
1. Is there anything I can do to prevent the sale of the freehold prior to my court hearing?
2. Am I able to place a unilateral charge on the freehold now or do I have to wait until my court hearing awards me damages?
ANSWER
Overview
Rightly, the reader has given the freeholder short shrift and reminded him that there is a mandatory statutory procedure to be followed before a landlord can sell the freehold (or superior lease) of a building containing flats let on long leases. A failure to follow that procedure can result in criminal sanctions (Landlord & Tenant Act 1987, s. 10A). Of more immediate relevance, the 1987 Act gives leaseholders, acting by a requisite majority of the leaseholder body, the right to compel the purchaser of the freehold (or subsequent purchaser, if it has been on-sold) to transfer it to the leaseholders’ nominee at the price paid for it.
However, as our reader notes, there can be delays in court proceedings, which may afford the freeholder the chance to dispose of the freehold (lawfully) before our reader obtains a judgment against him on the disrepair claim.
A number of questions are raised and the position needs to be evaluated from a tactical/commercial perspective as well as from a legal stand-point.
The First Question
Firstly, I am asked whether there is anything that can be done to prevent the sale of the freehold before the conclusion of the court proceedings.
Sadly, there is a short answer and clear answer to this question. That answer is “no”, unless the proposed sale would be in breach of 1987 Act rights of first refusal, in which case an injunction could be obtained to restrain the breach of a statutory duty.
If, however, the freeholder duly serves a compliant section 5B offer notice that notifies leaseholders of a proposed sale by auction on a date that is at least four months away, the 1987 Act will not prevent the sale at auction. All the 1987 Act will do is give the leaseholders the right to take the freehold off the successful bidder at the auction at the auction sale price – one pound if the freeholder’s threat is carried out.
The difficulty with trying to rely on any general principles of law to prevent the sale of the freehold whilst the court proceedings are on-foot is that the proceedings are for a money judgement against the freeholder personally and not a proprietary claim in respect of the freehold property itself.
The current freeholder will remain liable for damages in disrepair to the date of any sale and the in-coming freeholder will only be liable for damages (if any) from the date of purchase. Hence, the reader’s claim for damages will continue against the freeholder should he sell the freehold and not be effected by a sale of the freehold.
The practical difficulty for the reader is that a sale by the freeholder, whilst not curtailing the claim against the freeholder, could well make it far more difficult to enforce the judgement against him (i.e. to get paid).
Firstly, the freeholder could disappear after the sale, or have limited assets to enforce against. Secondly, it will not be possible to set off the damages awarded against the freeholder against rent/service charges that fall due after the sale and are owed to the purchaser, unless the lease specifically provides otherwise (which it is very unlikely to do): see Edlington Properties v J.H. Fenner & Co [2006] 1 W.L.R. 1583
Clearly the sale needs to be prevented if possible. If the disrepairs have not been remedied, then the claim will (or at least should) include a claim for an order for specific performance (a court order to compel the freeholder to carry out remedial works to comply with the landlord’s repairing covenant).
If there is a claim for specific performance, then, any purchaser of the freehold could be (and should be) joined as a further Defendant to the claim. Few sane people wish to buy into on-going litigation. Hence, should the freehold be put up for auction, the auctioneer should be asked in writing to draw bidders’ attention to this risk. In my experience auction houses are very reluctant to allow a sale to continue if the seller is not prepared to disclose materially adverse matters, such as on-going litigation.
Hence, by kicking up a fuss, as late as possible, for obvious tactical reasons, you may get the sale pulled from the auction. Alternatively, the sale may go ahead, but at a reduced price to reflect the risks of the purchaser becoming enmeshed in litigation, in which case the leaseholders, relying on their 1987 Act rights, could take the freehold off the purchaser for a knock-down price.
The Second Question
The second question is whether it is possible to place a unilateral notice on the freehold title pending the outcome of the court proceedings.
Unfortunately, it will not be. Again, the problem is that the claim is a claim for damages against the freeholder, not a claim relating to the freehold land or any interest in the land. It is therefore not a pending land action[1]. Consequently the litigation that cannot be protected by registering a notice at HM Land Registry against the defendant freeholder’s title.
In any event, a unilateral notice would not (even if it could be registered) “freeze the title” and thereby prevent a sale of the freehold. In very simplistic terms, it is no more than a mechanism created by the Land Registration Act for putting a purchaser on notice and hence preventing a purchaser from taking free of the interest that is protected by registration. As explained above, in practical terms, the same outcome could probably be achieved by going to the auction house and kicking-up a fuss.
Stan Gallagher, Barrister at Tanfield Chambers
