Is the freeholder entitled to a percentage of the property-value uplift in this case?

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    Is the freeholder entitled to a percentage of the property-value uplift in this case?

    Hi there, I'd very much appreciate some informed thoughts on the question of property value uplift.

    Here's the background: I live in one flat of four in a detached house. The owners of the four flats secured the freehold collectively a few years ago. We are now tenants in trust (I think that's the term), governed by the lease which we allowed to carry over from the period in which we were leaseholders only.

    A property developer has acquired the basement flat in the property, which comes with its own private garden (delineated in the block plan that comes with the deeds). He wishes to sub-divide the basement into two flats, create a new entrance and build an extension. I think his plan is to sell the two flats. As I understand it, by the terms of the lease, he will require freeholder permission to create the new entrance, build the extension and (I think) sub-divide. He will require planning permission for these. Here are my questions:

    - by what right is the freeholder able to levy a percentage of any uplift in value as a result of development of this sort? Is it merely a negotiation based on the fact that the lease terms are being breached?

    - I have seen the calculation of 50% of perceived increase in value being proposed as 'standard' in these cases - is that percentage standard? In this case it would be slightly complicated by the fact that the developer who has bought the flat is now of course also a tenant in trust of the freehold.

    - How is the perceived increase in value arrived at? By an independent surveyor's report? Or would we wait until he has sold the flats to agree any amount?

    - If the terms of the lease forbid sub-division, does the sub-division also fall into the calculation regarding increase in value? Sub-division makes financial sense I imagine, so presumably there is an uplift from that alone.

    I'd appreciate any advice anyone might have with knowledge of situations like this. I have read a bit online, but it's quite vague.

    Thanks very much


    #2
    I believe you usually ask for 50% of the profit, (as a condition of giving consent.)

    Comment


      #3
      The proposed works involve both alterations and a change of use. If the lease absolutely prohibits either the landlord is entitled to refuse consent and can therefore demand what ever premium he likes.

      If both are permitted with consent then the provsions of subsections (2) and (3) of section 19 of the Landlord and Tenant Act 1927 apply:

      (2) In all leases whether made before or after the commencement of this Act containing a covenant condition or agreement against the making of improvements without a licence or consent, such covenant condition or agreement shall be deemed, notwithstanding any express provision to the contrary, to be subject to a proviso that such licence or consent is not to be unreasonably withheld; but this proviso does not preclude the right to require as a condition of such licence or consent the payment of a reasonable sum in respect of any damage to or diminution in the value of the premises or any neighbouring premises belonging to the landlord, and of any legal or other expenses properly incurred in connection with such licence or consent nor, in the case of an improvement which does not add to the letting value of the holding, does it preclude the right to require as a condition of such licence or consent, where such a requirement would be reasonable, an undertaking on the part of the tenant to reinstate the premises in the condition in which they were before the improvement was executed.

      (3) In all leases whether made before or after the commencement of this Act containing a covenant condition or agreement against the alteration of the user of the demised premises, without licence or consent, such covenant condition or agreement shall, if the alteration does not involve any structural alteration of the premises, be deemed, notwithstanding any express provision to the contrary, to be subject to a proviso that no fine or sum of money in the nature of a fine, whether by way of increase of rent or otherwise, shall be payable for or in respect of such licence or consent; but this proviso does not preclude the right of the landlord to require payment of a reasonable sum in respect of any damage to or diminution in the value of the premises or any neighbouring premises belonging to him and of any legal or other expenses incurred in connection with such licence or consent.

      Note the parts in red. Since the changes will enhance the value rather than decrease it no premium can be charged.

      Comment


        #4
        Thanks, Lawcruncher, that's useful, much appreciated.

        Comment


          #5
          Since the changes will enhance the value rather than decrease it no premium can be charged.
          section 3 included this statement:
          if the alteration does not involve any structural alteration of the premises, be deemed, notwithstanding any express provision to the contrary, to be subject to a proviso that no fine or sum of money in the nature of a fine, whether by way of increase of rent or otherwise, shall be payable for or in respect of such licence or consent;

          The proposed changes do involve structural alterations,so that surely means that a premium can be charged.

          Comment


            #6
            Thanks Pilman, yes, an extension would seem to be a structural alteration. As for the question of increased or diminished value, an extension may add value to the basement flat, but it arguably may reduce the value of other flats. Also, thanks to Lawcruncher's citation, I wonder whether any possible decision on the part of the freeholders, in accordance with the lease, to prevent the construction of an extension could be construed as being 'unreasonably withheld'. I'd hope not. I don't know who makes such a judgment or how.

            Comment


              #7
              You're going to need all the leases re-writing, aren't you? Otherwise each new flat will only be paying half the service charge the rest of you are.

              Comment


                #8
                Just a thought. ( Not a legal reply )
                Is it not the freeholder that decides how many flats the are in a building, and not a leaseholder.
                The developer is not wanting to make alterations, he is building, acquiring, making, adding a new flat, a new address,( flat 5 ) a new council tax residence.

                It is the freeholder that makes flats, makes a lease, then sells that lease.
                There is currently no lease for a fifth flat, nor should you make one.

                If it were me, I would state that the freeholder makes flats out of a building, as it owns that building, and not leaseholders, and that the freeholder does not wish to make another flat in the building it owns.

                Also, ( having had developers here 3 times ) they don't give a dam about you, the residents, the commandeering of other leaseholders parking spaces by workmen's vehicles, equipment, noise, blocking garages, the driveway etc.
                You can send as many letters to them to "Cease and desist" which they will ignore, as they will be gone in 3 to 6 months after the work is completed.

                Comment


                  #9
                  Thanks for your thoughts JKO and ram - much appreciated.

                  Comment


                    #10
                    Whilst I tend to agree that property developers are undesirable, the new leases will be sub-leases, so they won't belong to the freeholder, until the relevant head lease expires.

                    Many leases will have absolute prohibitions on sub-letting part, which will stop such leases (even short ones) being created, if the covenants are enforced, and many leases restrict the use of the flat to being a single family home, as an absolute restriction, which would also be breached.

                    In such cases, I think one should be considering refusing permission entirely, rather than asking for a premium. For a share of a freehold, what constitutes increased value is more than the value of the reversion, but includes things that cannot be put into monetary terms. I'm not sure how well the legal system allows for that.

                    Comment


                      #11
                      Whilst I tend to agree that property developers are undesirable
                      So no more new houses should be built then?

                      Comment


                        #12
                        They are undesirable when they get involved with single flats in a block.

                        They are necessary when whole properties get to the end of their life, although even then, I find that single property developers seem to have no consideration for the neighbours or public realm. It is only the big developers who make any pretence of protecting the community.

                        Comment


                          #13
                          Originally posted by pilman View Post
                          So no more new houses should be built then?
                          We are not talking about new house builds which are being sold as ONE complete unit, and not converted.

                          We are talking about a person selling half of his flat,which he cant do.and the freholders should stop this money making process.
                          Even if there is not a clause saying "not to part with part of the flat" I personally would stop the conversion in what ever way was open to me.

                          Comment


                            #14
                            But there is money to be had by both the freeholder and the other leaseholders...for getting involved with the development within their building.

                            If the developer doesn't like the cash demands made then he will move on!

                            Comment

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