Memorandum submitted by Morgoed Estates Limited (TRI 13)
Morgoed Estates is one of the largest owners of ground rents and rentcharges in the country with more than 20,000 properties in our ownership. The vast majority of these are rentcharges, of which we are probably the largest owners in the country. We also manage another 5,000 rents on for over fifty people, many of whom rely on their rents as their principal source of income. In total our owned portfolio has a net worth of between £8-10million.
The Tribunals Courts and Enforcement Bill (TCE/"the Bill") as currently drafted is likely to have a prejudicial effect on the value of our properties and on those we manage on behalf of our clients, and we hence make these submissions to register this fact. This submission is supplemental to that made to the Tribunal Reform Team at the Department of Constitutional Affairs on 18 September 2006.
We are supportive of the general concept of Chapter 2 of the Bill in replacing the law of distress with the Commercial Rent Arrears Recovery procedure. The current law is confusing and uncertain in it operation for both landlords and tenants. However, we submit that the emphasis has been on the application to specifically commercial property. There are wider implications to what has been proposed that have been overlooked and several statutory provisions that have great beneficial and practical use are to be repealed without corresponding replacements in TCE.
1) Freehold and Leasehold Property: repeal of s.6 the Law of Distress Amendment Act 1908
The most significant of these provisions is s.6 of the Law of Distress Amendment Act 1908 (LDAA). This states that "to avoid distress", a landlord may obtain rent from a subtenant until any arrears from his immediate tenant have been paid off.
The application of this section to commercial property is to be replaced by the CRAR procedure in TCE. However it does not take into account its application to residential property which is an area where this section is widely used. Though recovering distress from a residential property is a remedy that requires a court order, this section operates as an alternative and therefore is particularly used where there a property is affected by leasehold interests of low value.
To give an example, in many areas of the country, particularly in the North West, landowners leased plots of development land to builders on long 999 year leases. The builders then created a new sub-lease at a higher rent for each house when they sold the houses off (999 years less two days from the date of the builder's lease, for example). The builder would then keep the intermediate lease and make a small profit on the difference between the rent from the householder and the rent paid to the freeholder. This process was often extended further. In some areas, such as Stockport, it is not uncommon to see a chain of five or six different leases affecting a single residential property.
The application of s.6 of the LDAA is crucial in situations such as this. Many of these intermediate leaseholders have ceased to collect their rents and in some cases are untraceable. By using s.6, the freeholder or superior lessee in the chain rents can reclaim rent from the sub tenants further down the chain. If s.6 is repealed, the only alternative left to a freeholder or superior lessee will be to forfeit the intermediate leases. This is prejudicial to both the owner of the lease, who will lose his interest, to the ultimate sub-tenant (usually the owner of the leasehold interest with the greatest value) and to the freeholder or superior lessee who will incur costs that may not be in proportion to the value of the interest gained. The costs will ultimately devolve to the innocent homeowner, who will be faced with having to take steps to protect his own lease.
It must be admitted that the individual sums involved are small, particularly considered in the light of commercial property transactions, but the number of the properties concerned is far larger. In our estimation there are at least 200,000 properties in the North West that are owned through a chain of leases. Given the crowded nature of urban centers, it is also increasingly common to see new blocks of flats owned through a chain of leases. Morgoed Estates itself has recently bought an intermediate leasehold interest in one such new block where our freeholder is a local authority in the West Midlands. Were Morgoed to refuse to pay the rent or go into liquidation, that local authority would be unable to claim the rent from the subtenants without the expense and aggravation of forfeiting the lease.
Thus we submit that a procedure that operates over residential property should be incorporated in TCE to replace s.6 of LDDA. Such a provision could be limited in scope to small sums (say a maximum of £1,000 of total arrears per residential unit affected) and to long leases (say over 21 years) if required so as to not conflict with any other method of commercial or residential rent recovery.
2) Rentcharges and distress: repeal of 121(2) Law of Property Act 1925 (LPA)
The repeal of s.121(2) of the LPA raises a number of issues. In our experience and in the absence of other legislation this provision is used as a guide by the courts as to when costs can be imposed in an action to recover rent due under a rentcharge. If distress can be sought for rent arrears and costs after 21 days of the rent being in arrears, it follows logically that costs for enforcing the rent should be allowed after 21 days of non-payment of the rent due. s.121(2) is also part of a stepped procedure of rent recovery to be read with in conjunction with s.121(3)-(4). If s.121(2) is repealed, the rentcharge owner will have no alternative to use far harsher recovery methods contained in the latter sub-clauses to recover rent or simply proceed to forfeit and reenter land as empowered by the various deeds creating the rentcharges. This will impose greater costs on the landowner and require considerable time and effort on behalf of the rentcharge owner.
If s.121(2) is to be repealed, a replacement procedure allowing the rentcharge owner to claim reasonable costs after 21 days should be put in place. This was covered in our submission of 18 September where we suggested that s.121(2) should be amended as follows:
"If at any time the annual sum or any part thereof is unpaid for twenty-one days next after the time appointed for any payment in respect thereof, the person entitled to receive the annual sum [shall be entitled to recover] the annual sum and all arrears thereof, and all costs and expenses occasioned by non-payment thereof, may be fully paid."
This amendment allows the 21 day period to remain while removing the reliance on
We submit that TCE has been introduced without considering the full implications of its effects. The Bill as it stands will impose extra costs on our business and may damage the capital value of our assets. It is also likely that as it is now drafted, the Bill will impose considerable extra costs on our lessees and rent payers as it removes the "softer" options to enforce payment of rents that require less time and administrative cost. We and our competitors may be forced to rely on harsher statutory provisions to protect our interests. These include forfeiture and reentry, remedies which are time consuming and incur costs, primarily of a legal nature, that will ultimately be borne by the lessee or rent payer alone.