Two special problems for the LPA Receiver

Problem 1: Dilapidations

A Receiver taking control of a commercial building may often wonder whether to pursue a dilapidations claim. The message from the trenches is actually that, when considering whether to pursue a dilapidations claim, rule number one may often be “Don’t”!

Dilapidations claims come in two basic flavours: one is the claim while the tenant’s lease is continuing; and the other is the claim at the end of the term.

First, in the case where the tenant is continuing, there are a number of remedies open to a landlord and therefore to the Receiver, his agent: a claim for damages; a claim for specific performance; entering, carrying out the work, and claiming the cost as a debt; and forfeiture. It is probably immediately obvious, merely by listing those remedies, that none of them is particularly effective.

Damages cannot normally be claimed during the term because the tenant’s lease is continuing; he retains his obligations; and the loss in investment value is hard, if not impossible, to quantify. In the absence of such a loss, there’s no claim.

The remedy of specific performance is so rarely available that, until relatively recently, it was believed to be legally impossible. That has since been disproved, but the circumstances have to be very extreme before a tenant will be required by the Court specifically to perform his covenants. Courts don’t like writing specifications of works.

The remedy of re-entry (otherwise known as a Jervis v Harris action, after a case of a few years ago) may sometimes be achieved but, in my experience, it can really only be achieved where the tenant consents and/or is reasonably cooperative. As far as I know, Jervis v Harris never works in a situation where the tenant is wholly hostile.

Lastly, forfeiture seems a remedy that the landlord (and therefore the Receiver) is unlikely to benefit from. If the tenant is an otherwise satisfactory one and is paying the rent, the value of the property is likely to be greater than if the lease is brought to an end. Even if that is not the case, for example where the rent is particularly low, then the tenant is almost certain to get relief from forfeiture on terms, and the Receiver will be no better off.

Second, claims at the end of the term are invariably claims in damages. They are limited to the lower of: (a) the cost of rectifying the breaches of covenant; and (b) the diminution in the value of the reversion. (That is a slight over-simplification, but a reliable one in most circumstances).

Now it’s one of the strange, practical features of dilapidations claims that everyone gets extremely cross on both sides when a dilapidations claim is in contemplation. The landlord thinks he should be paid for virtually everything the tenant has failed to do, and the tenant feels that he shouldn’t be paying for anything because the landlord’s loss can’t easily be determined. In principle, it should be possible for building surveyors to get together a few weeks after the end of the lease and settle the matter on a rational basis. If that can be done, excellent. However, my experience is that it can rarely be done in fact. Usually it takes an inordinate amount of time to get a sensible conclusion, often involving the threat of proceedings. There is now a Protocol in existence, with effect from 1 January 2012, which is aimed at speeding up and simplifying the process, but I could not honestly say that I think it is likely to achieve that desirable result.

There’s a further problem: the money to pursue the claim has to be paid in advance of recovery, and these claims take a long time. Some building surveyors I know are thinking up imaginative ways of helping with this problem where landlords are delinquent, so there may be hope on this front.

Nor I think will the Receiver normally be able to obtain an additional sum of money from the person to whom he sells the investment by transferring the right to sue for the dilapidations claim to him. Most purchasers are aware of most of the considerations canvassed above, and are unlikely to pay a premium for being put in the hot seat.

Problem 2: Leasehold enfranchisement

Where a Receiver is in control of a leasehold residential property, he will want to consider how the interest he has control of can be enlarged. Nowadays it is becoming increasingly difficult outside central London to sell a residential property (whether a house or a flat) with a medium or short lease – a lease any shorter than say 65 years. At around 50 years and below, it becomes dangerously close to impossible, unless advantage can be taken of the leasehold enfranchisement legislation: the Leasehold Reform Act 1967 as amended; and the Leasehold Reform Housing and Urban Development Act 1993 as amended. Both these Acts of Parliament allow for a qualifying lessee, of a qualifying property and with a qualifying lease, to serve a notice on his landlord requiring either the freehold or an extended lease.

Unfortunately however, these notices cannot be served by an agent, and of course a Receiver is an agent for the lessee. Actually, it’s worse than that. The problem of getting the extended lease or the freehold is normally overcome by the vendor serving notice and transferring the benefit of that notice to his purchaser. A purchaser who does not get the assignment of such a notice then has to wait two years from the date on which his interest is registered before he can serve a notice. Some purchasers will accept this but not many, and it may depend on how short the lease is whether that is palatable at all. Since most leasehold properties are sold with the benefit of a notice, finding someone willing to take without that benefit and having then to wait two years before he has that benefit may have a negative effect on the value of the property.

The only way round this that I can think of is persuading the borrower somehow to serve the notice. Certainly no borrower will do that for nothing, but it may be worth making a modest adjustment to the loan in order to achieve this and to achieve a better realisation for the lender.