Item No. Report title: Classification: Open Ward(s) or groups affected: From: Date: July 23 2007 Meeting Name Deputy Leader and Executive Member for Housing Sale of Freehold Reversionary Interests All Wards Affected The Strategic Director of Environment & Housing RECOMMENDATION(S) 1. That the Secretary of State be approached to ascertain if, in principle, he would accede to requests to dispose of the freehold reversionary interest of blocks (usually houses converted into flats) where some of the constituent flats were occupied by periodic tenants if (a) the periodic tenants agree and (b) their flats were subject to a 999 year leaseback and, 2. Subject to such agreement, agree to the proactive marketing and disposal of such interests in houses where 60% or more of the flats are sold on long leases on terms negotiated by the Strategic Director of Regeneration. BACKGROUND INFORMATION 3. The Leasehold Reform, Housing and Urban Development Act 1993 (as amended by Commonhold and Leasehold Reform Act 2002) gave leaseholders the right to collectively enfranchise that is the right to join together to purchase the freehold of their block so long as certain criteria are met. These criteria are numerous and detailed but some of the more important conditions are: At least two thirds of the flats are sold on long leases The minimum number of qualifying leaseholders voting in favour must equal at least half the total number of flats in the building (and where there are two flats both leaseholders must participate) No more than 25% of the block is commercial 4. In addition to this statutory right councils have had, since September 1994, the discretion to voluntarily sell the freehold reversionary interest in blocks (usually but not exclusively acquired houses street properties) where all the flats are sold on long leases and have been for two years (this time limit was reduced from five years in 2005). This power is pursuant to the General Consents made by the Secretary of State under section 32 ff Housing Act 1985. 5. The council s current policy was agreed by the Executive Member for Housing, using the individual decision making process, on 18 th January 2006. It includes: 1
(a) The use of the council s discretionary powers to sell the freehold interest in blocks where all the flats are sold (for five years) rather than asking leaseholders (collectively) to use the complicated, expensive and time consuming statutory route. (b) The pro active marketing of these interests i.e. approaching the leaseholders to ask if they wish to become their own landlords. 6. The council s current policy does not include the voluntary disposal of the freehold reversionary interest in a block where any of the constituent flats are let on a periodic tenancy or where the block includes commercial elements. In these situations leaseholders may have the statutory right to enfranchise and, if so, the council insists they use this route. 7. This new policy extends the existing principle of proactively marketing blocks where all of the constituent flats are sold to those where 60% or more of the flats are sold. For those relatively few blocks where between 60% and two thirds of the flats are sold such disposal can only be made with the permission of the Secretary of State. For blocks over two thirds or more of the flats have been sold leaseholders can use the statutory route however, again, it is planned that the council will seek the agreement of the Secretary of State so that the simpler, cheaper and less time consuming voluntary process can be employed. 8. The property market is still buoyant. When this is the case more people buy and sell their properties and there is a consequent desire to make their individual property marketable. Leaseholders can improve the internal parts of their flat but have little scope for making the external part of the building more attractive or indeed developing the property (roof extensions, conservatory etc). What leaseholders can do to improve marketability is to exercise their legal rights to own a share of their freehold or ensure that they have a mortgageable term of years remaining on their lease (anything less than 80 years can often present problems). Local authority stock is generally perceived by the market as being less desirable, consequently, local authority leaseholders are more likely to exercise these rights. This general concept has been borne out by experience in the Home Ownership Unit which has received several enfranchisement applications. 9. In addition to these external considerations are those around the inefficiencies of managing and maintaining individual street properties. These properties are invariably older than the council s purpose built estate portfolio and are therefore expensive to maintain. Access is often difficult because of street location and management issues occur because of different ownership of adjacent properties. Other management issues such as noise nuisance arise because of older construction methodologies. Whilst this stock is a useful asset in Southwark where there are high levels of housing need, considerable management and maintenance problems accrue. However, this seeming conundrum can be resolved : the taking back of 999 year leases of tenanted flats will mean the total stock available for letting will remain unaffected by this policy ; whilst the sale of the freehold reversionary interest means the responsibility for maintaining the structure, exterior, services and any installations, transfers to the new freeholders along with responsibility for managing the block as a whole. 2
KEY ISSUES FOR CONSIDERATION Current Situation 10. The existing policy has proved to be popular. As at 31 st October 2006 there were 226 blocks (216 street properties and 10 on estates) comprising 478 flats (450 and 28 respectively), where all the flats in the block have been sold. All leaseholders have been written to and at the present time the council are dealing with applications from 44 blocks. In addition to these the council has received applications from leaseholders in 3 blocks where not all of the constituent flats are sold on long leases to collectively enfranchise. 11. The following table shows the number of flats in blocks where not all of the constituent flats have been sold and would, therefore be affected by the change in policy. Blocks in which units sold 60-66.66% 66.67%-80% 80.01%-90% 90.01%-99.99% 58 108 22 0 The table below details the numbers of blocks in each Housing Area. Area 60%-66.65% 66.66%-80% 80.01%-90% Bermondsey 2 20 3 Borough & Bankside 13 13 4 Camberwell 8 13 4 Dulwich 11 20 3 N head & Peckham Rye 10 9 5 Peckham 0 3 0 Rotherhithe 3 4 0 Walworth 11 22 3 Consultation with Secure Tenants 12. One of the primary reasons for the Secretary of State to insist that each disposal has his agreement is to ensure that the interests of the secure tenants have been protected. If the freehold interest were to be sold on into private ownership the tenants would cease to be secure tenants with all of their encumbent rights (e.g. the Right to Buy ; Right to Improve ; Right to a Mutual Exchange ; Right to Repair ; Succession etc). 13. In effect, disposing of the freehold would be a small scale stock transfer. This means that the council must go through the consultation provisions set out in Section 105 Housing Act 1985 (as amended) before it sought the consent of the Secretary of State. The Secretary of State would look to see if the agreement of the secure tenants had been gained. 14. These consultation arrangements do not apply in the case of a formal application to collectively enfranchise pursuant to Leasehold Reform, Housing and Urban Development Act 1993 in the case of public authorities the Act provides that flats occupied by periodic tenants (such as secure tenants) should be the subject of a mandatory 999 year leaseback thus protecting 3
most of their statutory rights. This paper proposes to follow that model so that: (a) The freehold reversionary interest in blocks of flats where between 60% and two thirds of the flats have been sold on long leases can be disposed of (subject to leaseback of tenanted flats) and (b) The council can use its discretionary powers in cases where two thirds or more of the flats have been sold on long leases ; rather than subjecting the leaseholders to the stringencies of the statutory process. Managing flats on Leases 15. The disposal of the freehold reversionary interest and leaseback of individual flats does present some areas which are administratively burdensome situations for councils. There is new work to be undertaken, for example each year the new freeholders will send the council service charges in respect of their flats - the council would be under a fiduciary duty to check that the service charges are reasonable - perhaps by exercising their statutory rights as leaseholders - before paying these charges. Often areas of work change, so, for example, if the same tenant complains of disrepair, council officers must decide whether it is their responsibility to arrange for repairs to be undertaken (internal repairs) or whether a request must be made of the freeholders (repairs to the communal structures etc). There are strategic problems to tackle - if, for example, the new freeholders insist on higher standards of management, services or maintenance e.g. a three year external repair cycle or a concierge, can the council afford such services - should these 'enfranchised' rents be disaggregated or subject to service charges? There are also legal problems, for example what happens with the council offer notices when a secure tenant decides to exercise their Right to Buy or how the council defends forfeiture action for malfeasance of its secure tenant. However none of these issues are insurmountable they can be addressed by ensuring our management arrangements include training in these new areas of work. Ancillary Enfranchisement Issues 16. Only a maximum of four people can own the legal interest in land, if there are more than four applicants (and each joint leaseholder would be an applicant) then one of three solutions should be adopted. Sale can be made to four or less applicants if there are four or less The sale can be made to four or less applicants who hold the freehold in trust for all the other applicants (beneficiaries). The sale is to a management company as the single legal owner and all applicants own shares in the management company. While the first option protects the beneficiaries, all legal action is taken by the four named owners. If the Council retains an interest but is not one of the named owners, that potentially leaves the Council's position exposed. The second option allows all leaseholders equal (voting) rights in the management company and would perhaps 4
aid the council in dealing with some of the Issues outlined in paragraph, 3.5 above if it had shares proportional to its interest. In these circumstance the Executive Member is asked to agree that, whenever possible, officers should advocate the establishment of management companies as suitable transfer vehicles. 17. Where the block forms part of an estate, the council is able to recover a fair proportion of estate based service charges (such as estate lighting, cleaning, repairs garden maintenance) in respect of the retained estate from which the new freeholders derive benefit. For example, there may be an estate road maintained by the Housing Revenue Account which accesses the enfranchised block and other blocks on the estate. 18. Enforcing positive freehold covenants has always been problematic. The Leasehold Reform Housing and Urban Development Act 1993 dealt with this by allowing landlords to register estate management schemes and consequently having statutory right to enforce charges on other freeholders and their successors. Unfortunately landlords had to register their estates within two years and this period expired in October 1995, Southwark made no such applications. Giving this the Council has three options: (a) The more usual method would be freehold covenants, however should the freehold interest be sold on, the covenants would not be binding on the successor to the original purchaser and the council's interest could not be protected by virtue of section 33 Local Government (Miscellaneous Provisions) Act 1982. Legal action could be taken to pursue a claim against the original purchaser although for practical reasons this could prove problematical. In addition such covenants are onerous on the original freeholders and legal advice they may obtain may be against this form of agreement. The death of an individual or insolvency of a management company will also cause difficulties. (b) The sale of the freehold with the council taking back a head lease and granting an under lease which would include covenants to recover service charges. It may well be possible to negotiate such an arrangement if enfranchisement were undertaken by negotiation as outlined earlier in this report. (c) Reserving a variable estate rent charge, the only problem with this solution is that it could only be enforced by taking possession of the block rather than debt judgement. 19. The Executive Member is asked to agree that officers take whatever action is necessary to ensure, as far as practicable, that the council's financial interest are not adversely affected by enfranchisement. Basis of Disposal 20. Disposals would be made to those people entitled to exercise rights to acquire under the relevant legislation (usually the Right to Buy owner or any successor in title). The guiding principles for officers will be to negotiate the best financial settlement for the Council and to protect the interests of the remaining secure tenants and other leaseholders. 5
21. The disposal of the freehold reversionary interest will be at open market value and the terms will include covenants needed to protect recovery of any of the Council s estate service charges if appropriate. Community Impact Statement 22. This policy does not have any substantial equalities implications. There are two aspects of the policy which in any case reflects the statutory rights of leaseholders to enfranchise: Finance Comments (a) pro-actively offer the freehold reversionary interest of blocks where all the flats are sold these number less than 150 converted houses boroughwide. Invariably the current leaseholders have bought in the private sector. The policy has a marginal impact in terms of numbers, reflects the statutory position and the leaseholders concerned may well not be residents or individuals (i.e. they may be companies) (b) the insistence that the statutory route is used where some of the flats are tenanted or where there are commercial elements reflects the status quo and current statutory provisions. 23. The current regulations governing the use of capital receipts have a de minimus level of 10,000 which means that the council can keep for its own use all capital receipts from disposals valued at less than 10,000. Receipts of over 10,000 are subject to either a 50% (in case of housing land) or 75% (in the case of dwellings) clawback by the government for national pooling. Most of the disposals described in this report are houses converted into two or three flats where the freehold reversion is valued at less than 10,000. 24. There are potential revenue costs highlighted in paragraph 15 which could be offset by the potential savings highlighted in paragraph 9. 25. Part V Local Government and Housing Act 1989 (section 67 et sequentes) deals with companies in which local authorities have interests. This would include management companies described in paragraph 16 ante established to ensure all leaseholders (and the council would be a leaseholder) had influence on the management and spend decisions made in respect of the property. In these cases the conditions and controls outlined in section 71 will apply. 6
Legal Comments 26. As stated in the report, the Council is not in a position to implement this strategy without the consent of the Secretary of State. The legislation, mentioned in the report, accurately reflects the legal position. Should the Secretary of State grant consent, further more detailed legal advice will be given as appropriate to ensure compliance with the relevant legislation and also to protect the Council's interest as far as the law allows. Head of Property Comments 27. The negotiated disposal method proposed in this report can be expected to maximise the capital receipt obtainable in individual transactions, and is to be preferred to the statutory route for this reason. 28. Before inviting any groups of leaseholders to treat in this way the council should satisfy itself that its strategic objectives, and in particular its regeneration objectives, would not be frustrated or made more onerous to deliver as the result of a freehold transfer. Consultation 29. These issues have been considered by the Leaseholder Council, Area Forums and Tenant Council for information and comment. The following comments were received: Leaseholder Council held on 11 th December 2006 Endorsed report, subject to agreement with tenants in the blocks concerned BWAF held on 16 th January 2007 Resolved that they would prefer the current policy to stay as it is, and do not agree with the proactive marketing and disposal of the freehold interest in blocks where the percentage is reduced to BEAF held on 17 th January 2007 Resolved that they would like to retain the current policy as agreed by the Executive Member for Housing on 18 th January 2006 B&BAF held on 16 th January 2007 Rejected report Camberwell East Area Forum held on 15 th January 2007 Rejected report CWAF held on 24 th January 2007 Agreed the recommendations provided that no costs are incurred from the HRA DAF held on 18 th January 2007 Endorsed report NAF held on 18 th January 2007 7
Supported the policy as long as the tenants remain secure. PAF held on 23 rd January 2007 Rejected report RAF held on 16 th January 2007 Endorsed report WEAF held on 25 th January 2007 Endorsed report WWAF held on 18 th January 2007 Endorsed report WCAF held on 23 rd January 2007 Rejected report Tenant Council held on 26 th February 2007 Rejected the report unanimously Conclusion 30. Detailed procedures will need to be drawn up to deal with such issues as consultation, the terms of 999 year leaseback leases; Secretary of state s permission; and post disposal management arrangements, described in this report. For the state of brevity the report has not examined the detail of the legislation which will form part of the procedures that will be adopted. Instead it has dealt with the major issues of a response to customer needs, financial probity and authority to use discretionary powers in suitable situations. The main thrust of this report is that the Executive Member agrees that where the council must sell on in land a negotiated disposal can bring benefits to the council. 8
BACKGROUND DOCUMENTS Background Papers Held At Contact Sale of Freehold Reversionary Interests, Collective Enfranchisement and Lease Extensions Home Ownership Martin Green 0207 525 1418 AUDIT TRAIL Lead Officer: Gill Davies Report author: Martin Green Version: Final Dated: July 23 2007 Key decision: Yes CONSULTATION WITH OTHER OFFICERS/DIRECTORATES/EXECUTIVE MEMBER Officer title Comments Sought Comments Included Borough Solicitor & Secretary Yes Yes Chief Finance Officer Yes Yes Executive Member Yes Yes Date final report sent to Constitutional Support Services July 23 2007 9