UK: A Collective Cause For Concern

Last Updated: 25 March 2013
Article by Neil Jamieson and Tom White

Transactional and advisory work in the UK real estate sector continues to be the source of a vast number of claims against property professionals, particularly solicitors but also surveyors. With the economy lurching from one crisis to the next and fears of further drops in property prices, it is unlikely that improved property market conditions will help to disguise the consequences of negligence in the near future.

The last thing insurers needed, therefore, was a new source of property claims to add to those which were around during the last major recession of the early 1990s. However, that is what they are having to contend with in the shape of claims resulting from the collective enfranchisement legislation which did not exist until 1993. Collective enfranchisement is the procedure by which a group of tenants in a block of flats is entitled to acquire the freehold in the block provided that certain criteria are met and a specified procedure is followed. That procedure is set out in the Leasehold Reform Housing and Urban Development Act 1993 which contains a complex web of requirements including the service of notices and counter-notices and for the commencement of court/ tribunal proceedings within strict and specified time limits. There can be serious consequences if those time limits are missed or a notice is wrong.

As with the Landlord and Tenant Act 1954 for the renewal of business leases, the 1993 Act is in danger of turning into a graveyard for professional advisers. For high value properties in central London the stakes can be very high with one missed deadline or a defective notice resulting in a seven figure claim. It is not unusual for enfranchisement applications to comprise dozens of flats with a cumulative value of GBP 20 million or more – equivalent size to a large corporate transaction but with a much higher risk profile.

The most common causes of claims in this area are generally down to lack of attention to detail or poor administration:

  • A failure on the part of the professional to define clearly the scope of his duty – for example in Littlewood v Radford (2009) (which related to a slightly different type of enfranchisement, but the same principles apply) a surveyor came unstuck because, despite being without instructions and his bills not being paid, he had not done enough to terminate his retainer before one of the deadlines imposed by the 1993 Act passed

  • Mistakes contained in notices served on behalf of the tenants such as incorrect names or mis-description of the property – a good example of how technical this area can be is Hilmi & Associates Ltd v 20 Pembridge Villas Freehold Ltd (2010) in which the Court of Appeal found that an initial notice served on behalf of a group of tenants which included a corporate tenant was invalid because the notice had only been signed by one director of the company, rather than having been executed in accordance with the requirements of the Companies Act 1985 (as was in force at the relevant time)

  • Errors in plans accompanying notices

  • Missed deadlines for commencing proceedings, which can lead to the application being deemed withdrawn

  • Errors in valuations undertaken on behalf of landlords and tenants pursuant to complex valuation principles

Collective enfranchisement has proved popular, all the more so in recent years as it has been extended to a wider range of tenants. A time of depressed property values can also be seen as a good time to launch an application. The law of averages dictates that the more applications that are made the greater will be the number of human errors in processing them.

One piece of good news is that unlike the 1954 Act where a missed deadline can kill off a tenant’s rights once and for all, if something goes wrong with a collective enfranchisement application the tenants can usually restart the process, either immediately or a year later depending on the nature of the mistake. However, restarting the enfranchisement process is likely only to mitigate loss and not avoid it altogether. At the very least there will be wasted costs by having to go through the same steps twice. In addition, postponing the valuation date can lead to an increase in the price for the freehold sometimes to a painfully large degree. For example, if the delay causes the length of the tenants’ leases to fall below 80 years they must share the marriage value created by the merger of the freehold and leasehold interests with the landlord. This is not required if the leases have more than 80 years left to run. For precisely this reason a large proportion of enfranchisement applications relate to leases of fractionally over 80 years thereby raising the stakes for those who have the responsibility for getting the procedure right.

In light of these risks and exposures the safest course might be to steer clear of this work altogether but that is not a realistic option for firms that specialise in residential property work for whom this can be a lucrative source of business. However, the emphasis must be on the word specialist: this is an area where professionals and their insurers must recognise that it is extremely risky to dabble. To solicitors and surveyors with a real expertise and experience in this area the intricacies of the legislation and the time limits involved become second nature which, combined with tailored risk management systems involving computerised double diary entries, reminder procedures and adequate supervision of juniors, helps to reduce the risk of claims.

Of course, it is impossible to eradicate errors entirely even in the best run office. To limit the exposure in those cases which do slip through the net it is important that a liability cap is in place. Even more important is a culture which leads to the early identification and reporting of problems. In common with other areas of landlord and tenant work there is often an opportunity to take corrective measures provided that the options are considered without delay.

It may be possible, for example, to serve a fresh notice but if the window for doing so has closed by the time the mistake is uncovered that will not just be frustrating, it may also lead to awkward conversations between insurers and insured.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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