One of the worst aspects of leasehold legislation, and the one that caused the Labour
Party to describe the system as feudal in 1996, is the forfeiture of the lease.
By Mira Bar-Hillel
Under legislation going back to 1925, landlords have been able to forfeit leases unilaterally and almost at will, citing breaches of covenant, which they did not always have to prove. Once the landlord declared the lease forfeit, the leaseholder effectively became a squatter in his own home, with no legal status at all.
Options were limited to seeking “relief from forfeiture” from the courts. This usually worked, as contemporary judges always have been reluctant to allow such blatant miscarriages of justice. But the law is the law, and even when relief is granted, on payment of what the landlord claims to be outstanding debts, costs always are awarded to the landlord.
The system was usefully tinkered with in the 1996 and 2002 Acts, but forfeiture as a concept remained in place. It is now, however, likely to be abolished altogether following excellent recommendations made after a thorough review by the Law Commission.
The Commission accepts that landlords should still be able to terminate leases if the leaseholder fails to pay the ground rent, or breaches the lease in any other demonstrable way. But they want the law changed both practically and semantically. Abolition of the very word forfeiture, even if this is merely to substitute terminate for forfeit in itself will be a step forward, as the historic word - along with the dreaded 146 Notice that was the landlords’ weapon of mass desperation - always struck fear into the minds of leaseholders. It is also the clear intention to make the termination of the lease the last resort and not, as it often seems today, the first.
It therefore proposes that instead of being able to issue a unilateral forfeiture notice, which immediately puts the leaseholder at a massive disadvantage by pulling the rug from under their feet, landlords will first have to serve a default notice, stating exactly what is wrong and what must be done to put it right. Then, and only if the leaseholder fails to do what is required, may the landlord begin proceedings in the courts.
Moreover, in an important change to the current situation when the lease is effectively ended before even the start of the proceedings, it would now end only when the court makes a termination order, having of course decided that it is reasonable, appropriate and proportionate to do so. The latter term is crucial: it is obviously disproportionate to terminate a lease worth tens of hundreds of pounds over an unpaid ground rent of a few hundred pounds.
Another hugely important recommendation is the courts also will also be able to make an order for sale. This option should signal the end of the unacceptable situation where a landlord forfeits a lease, sells the property and gets the entire proceeds, rather than just what he or she is actually owed. Instead, the leasehold property will be sold by order of the court, and the landlord will only get what he is owed with the leaseholder getting the rest. The removal of the windfall option should also deter landlords from frivolous and vexatious proceedings.
The landlord must give the leaseholder a prescribed notice, detailing what his rights are and stating date for payment (between 30 and 60 days after notice is given) when making any rent demand.
The leaseholder is not liable to pay until such a notice is given.
Default notice: If the landlord wishes to terminate the lease for non-payment of rent or service charge, he may not serve a default notice unless the amount owed exceeds £350 or the amount has been outstanding for longer than three years. If the landlord wishes to terminate the lease for any other breach of covenant, he may not serve a tenant default notice unless or until the leaseholder admits the breach or a leasehold valuation tribunal has determined the breach has occurred.
If he can cross these hurdles, the land lord may serve a default notice, and in the event of a failure to pay up, or to put right the breach of covenant, proceedings for a termination order may be brought in the courts.
At this stage, the Law Commission recommends the courts be allowed to consider a range of options.
Mr Bridge said: “We recommend the court should now be required to consider whether it should make an order for sale of the leaseholder’s interest, instead of a termination order. This is in addition to its powers to make a remedial order, requiring payment of the rent or putting right the breach on the basis that if this does not happen, the landlord may return to court for a further order.
“An order for sale would be particularly useful where, as will often be the case with a long leasehold, the lease has a high capital value, and the landlord stands to obtain an undeserved large windfall in the event of its termination. The court could instead order sale, which would be undertaken by a receiver appointed by the court. The landlord and any other legitimate creditor (such as mortgagees) would be paid out, with the residue going to the leaseholder.
“A number of consultees urged the order for sale upon us during the consultation process. This recommendation is a classic example of the value of an open consultation process. We believe the order for sale would be an extremely useful remedy in some cases where the lease has a significant capital value. It would ensure the landlord would obtain the sums due under the lease, but it would not give rise to a disproportionate windfall, as sometimes occurs under the current law.”
Peter Haler, director of the Leasehold Advisory Service (LEASE), said the recommendations were exactly what leaseholders needed and he hoped that legislation would soon follow.
“These recommendations will form the final step in the replacement of this feudal and outdated provision. Forfeiture was, and presently, remains, a draconian and disproportionate remedy providing an entirely unjustified windfall for the landlord, who gets the full value of the flat, not just the money he’s owed, while the dispossessed leaseholder ends up with nothing but a mortgage.
“The Law Commission’s proposals provide natural justice. No-one denies the need for a final sanction for landlords faced with obdurate non-payment but the proposal for a power of sale ensures the landlord gets his due owings but the residue of the value of the flat remains with the ex-leaseholder, who licks his wounds and lives to fight another day.”
While of course most landlords and agents are not unscrupulous, the few tar others with the same brush. In 2004 a freeholder forfeited a 900-plus year lease on a house over the non-payment of £6.50 annual ground rent, for which no demand was ever sent. He then added an administration charge. The leaseholder paid the ground rent only. In 2005/2006 he received a demand that included an arrears reminder charge of £23.50, which he ignored.
The landlord is now demanding £70.50 and is threatening LVT or court action to recover it. Under the new rules, this situation could not arise, as the ground rent would not be payable without a demand being issued in the first place.
As Peter Haler points out, the Law Commission’s recommendations – which are helpfully accompanied by a draft Bill – would close some of the last remaining loopholes that have enabled freeholders to evade the will of Parliament since the Evening Standard campaign first addressed the issue head on in 1996. At that time, legislation was introduced – by a Conservative government, it must be said – literally within weeks of the start of the press campaign, but after that, things slowed down considerably.
Ten years on, the Law Commission’s work should be warmly welcomed. But thought also should be given to why the process has been so prolonged and sluggish when the problems are well known, widespread and extremely painful for the victims. Housing Minister Yvette Cooper should now embrace these recommendations and implement them in full and without further delay.
Forfeiture – a living example The new law, if it is accepted by government, will come too late to help people such as Noelle Rawe, who owns a £250,000 basement flat in central London. Among 35 leaseholders in her block, she was sent a demand for £14,400 in 2001 for unspecified major works, ostensibly for work on the roof and communal areas.
In the absence of sufficient detail of how the money was to be spent, Noelle suspected much of her money was going to be used by the landlord to construct two extra flats on the roof, entirely to his own benefit.
Noelle took the case to the LVT, which, in 2003 ruled that some of the proposed works had not been costed as they should have been; that the stated cost of refurbishing the lift seemed excessive and some of the costs should have been met from an existing contingency fund, not from new contributions from leaseholders. The LVT reduced the bill to £6,300.
However in the meantime, the landlord took Noelle and her neighbours to court, thereby forfeiting their leases and threatening to take possession of their homes if they did not pay. Under the new rules the landlord would not be able to do this, which should encourage the leaseholders to resist such attempts in the future.
Mira Bar-Hillel has been writing regularly on property and leaseholder issues for the Evening Standard since 1982
