Question 1

Controlling sub-tenants after buying the freehold

Accepted Answer

A number of flats in our block are buy-to-lets. Some of the sub-tenants in these flats are problematic as they are short-term residents with no vested interest in the building or the community of residents. We would prefer a block of owner-residents. We are about to purchase the freehold, and our question is whether this affords us an opportunity to stop the sub-letting of flats. Could we vary our leases to enable us to ban, or at least control, the sub-letting of flats? The FPRA replies: I would firstly observe that the growth of “buy to let” has meant that we have received many queries about the problems of sub-letting. Whilst that bubble may now have burst, there will be many other cases where leaseholders turn to letting because of present difficulties in selling. I have had a look at your lease, and there is no restriction on sub-letting in your lease, apart from the usual prohibition of sub-letting of part of a flat (clause 4(i) on p 10). I have seen a few leases which prohibit sub-letting entirely, but these are rare. Even prospective purchasers who like the idea of living in a block inhabited entirely by owner occupiers may feel that it is unduly restrictive to prohibit sub-letting entirely; they may need to sub-let for a while themselves if their work takes them to another part of the country, or abroad, or if they should need to go into a residential or nursing home for a while. (Ironically, in one case where I came across the outright ban, I was acting for a purchaser who was buying the flat for his student son to occupy with some friends. The son would not be paying his father rent, and the friends would be lodgers rather than tenants, so this mode of occupation would not therefore breach the lease!). You may find that it is an acceptable compromise not to ban sub-letting outright, but to impose a condition that sub-letting should be allowed only with the consent of the landlord. Whether or not the following words are included, it would be implied in law that “such consent is not to be unreasonably withheld”. The only trouble is that there is not much guidance from the case law on what sort of factors you can take into account in giving and withholding consent. If you had such a condition in your leases, then you could ask leaseholders to provide financial and personal references for their prospective tenants – although it is arguable that, as the leaseholder will remain liable for the service charges, the financial position of the tenants is not particularly relevant! You could, I think, certainly insist that any tenancy agreement is vetted by the solicitor to the Freehold Company, at the expense of the leaseholder. This would ensure that any restrictions in the lease are carried over into the tenancy agreement, so that the tenant knows what they are. Restrictions in the lease are, in fact, as a matter of law binding on sub-tenants even if they are not contained in the tenancy agreement, but it is good practice for them to be brought to the sub-tenant’s notice. Insisting on references and the vetting of the tenancy agreement is likely to delay the granting of sub-tenancies. Leaseholders who are sub-letting because e.g. they are about to go abroad may accept this, but increasing the length of void periods may discourage buy-to-let leaseholders, who may feel that better profits are to be obtained in blocks which do not insist on this. The only wording in your existing lease which may be of some use in restricting sub-letting is clause 2(j) on p 5, which deals with insurance. I have seen it argued that, if an insurance company imposes a condition that lettings should not be to students or to housing benefit claimants, and would weight the premium for the block if this condition were breached, then such a clause could be used to insist that leaseholders do not sub-let to any of these prohibited categories. It may be worth a try to use this argument, if applicable. First, I should point out that the fact that you are acquiring your freehold will not make as much difference as you might think to the practicality of amending your leases. Some residents’ associations who acquire their freehold think that, after acquiring their freehold, it will then simply be a case of passing a resolution at an AGM to ban the keeping of pets, restrict sub-letting, alter parking arrangements, etc. This is very definitely not the case. Even when the freehold has been acquired by the leaseholders, the existing leases continue to govern the relationship between the Freehold Company and each individual leaseholder. The Freehold Company cannot impose any restrictions on the leaseholders that go beyond the scope of the terms of the lease. With regard to varying leases generally, I would strongly recommend that you buy a copy of a booklet that I originally prepared for FPRA which deals in some detail with varying leases; it is available from the Office for £10. It is not an appropriate use of my time to go over these points in reply to each and every letter that enquires about varying leases. Acquiring the freehold will make it easier to vary your leases in that it would be difficult, though not impossible, to vary leases if the ground landlord were not “on board”. The most straightforward way of varying leases is by unanimity: all the leaseholders and the Freehold Company sign appropriate Deeds of Variation, which are then registered at the Land Registry. This may, however, simply not be possible. If you cannot achieve unanimity, you can also vary all the leases under section 37 of the Landlord and Tenant Act 1987 by an application to the Leasehold Valuation Tribunal. Any such application must be supported by at least 75% of the parties and must not be opposed by more than 10% of the parties. Owning the freehold gives you an advantage if you are seeking variation, as the landlord counts as one of the parties. So the majority viewpoint is likely to be able to bring the landlord on board as well. If you have 14 leaseholders you have 15 parties, including the landlord. So at least 12 parties (which could be 11 leaseholders, plus the landlord) must therefore support the proposed variation, and no more than one leaseholder must oppose the proposal (if 2 leaseholders opposed the proposal, it would be opposed by 13% of the parties). I am not aware of any cases where leaseholders have got leases varied to restrict sub-letting by using s 37 LTA 1987, though in principle it should be possible. The Act says that leases should not be varied if the variation would “substantially prejudice” any leaseholder, and an award of financial compensation would not be adequate recompense. This latter provision is unlikely to apply here: it is more likely to be relevant where, e.g., the addition of an extra storey prejudices the leaseholders on the existing top floor, or an alteration to parking arrangements prejudices one or more leaseholders. Another course of action which might be worth considering is for those who are willing to have their leases amended to go ahead with it, in the hope that when the flat(s) owned by the dissenter(s) eventually change hands a future owner may be prepared to come on board. Members may, however, be unwilling to impose such restrictions upon themselves if not all are willing to do so. On the other hand, I have heard anecdotal evidence of higher prices being attained in a block which bars sub-letting compared with those attained in an identical block which does not, so there may be an advantage in making substantial progress towards the eventual aim of a block where sub-lettings are restricted.

Question 2

Controlling sub-tenants after buying the freehold

Accepted Answer

A number of flats in our block are buy-to-lets. Some of the sub-tenants in these flats are problematic as they are short-term residents with no vested interest in the building or the community of residents. We would prefer a block of owner-residents. We are about to purchase the freehold, and our question is whether this affords us an opportunity to stop the sub-letting of flats. Could we vary our leases to enable us to ban, or at least control, the sub-letting of flats? The FPRA replies: I would firstly observe that the growth of “buy to let” has meant that we have received many queries about the problems of sub-letting. Whilst that bubble may now have burst, there will be many other cases where leaseholders turn to letting because of present difficulties in selling. I have had a look at your lease, and there is no restriction on sub-letting in your lease, apart from the usual prohibition of sub-letting of part of a flat (clause 4(i) on p 10). I have seen a few leases which prohibit sub-letting entirely, but these are rare. Even prospective purchasers who like the idea of living in a block inhabited entirely by owner occupiers may feel that it is unduly restrictive to prohibit sub-letting entirely; they may need to sub-let for a while themselves if their work takes them to another part of the country, or abroad, or if they should need to go into a residential or nursing home for a while. (Ironically, in one case where I came across the outright ban, I was acting for a purchaser who was buying the flat for his student son to occupy with some friends. The son would not be paying his father rent, and the friends would be lodgers rather than tenants, so this mode of occupation would not therefore breach the lease!). You may find that it is an acceptable compromise not to ban sub-letting outright, but to impose a condition that sub-letting should be allowed only with the consent of the landlord. Whether or not the following words are included, it would be implied in law that “such consent is not to be unreasonably withheld”. The only trouble is that there is not much guidance from the case law on what sort of factors you can take into account in giving and withholding consent. If you had such a condition in your leases, then you could ask leaseholders to provide financial and personal references for their prospective tenants – although it is arguable that, as the leaseholder will remain liable for the service charges, the financial position of the tenants is not particularly relevant! You could, I think, certainly insist that any tenancy agreement is vetted by the solicitor to the Freehold Company, at the expense of the leaseholder. This would ensure that any restrictions in the lease are carried over into the tenancy agreement, so that the tenant knows what they are. Restrictions in the lease are, in fact, as a matter of law binding on sub-tenants even if they are not contained in the tenancy agreement, but it is good practice for them to be brought to the sub-tenant’s notice. Insisting on references and the vetting of the tenancy agreement is likely to delay the granting of sub-tenancies. Leaseholders who are sub-letting because e.g. they are about to go abroad may accept this, but increasing the length of void periods may discourage buy-to-let leaseholders, who may feel that better profits are to be obtained in blocks which do not insist on this. The only wording in your existing lease which may be of some use in restricting sub-letting is clause 2(j) on p 5, which deals with insurance. I have seen it argued that, if an insurance company imposes a condition that lettings should not be to students or to housing benefit claimants, and would weight the premium for the block if this condition were breached, then such a clause could be used to insist that leaseholders do not sub-let to any of these prohibited categories. It may be worth a try to use this argument, if applicable. First, I should point out that the fact that you are acquiring your freehold will not make as much difference as you might think to the practicality of amending your leases. Some residents’ associations who acquire their freehold think that, after acquiring their freehold, it will then simply be a case of passing a resolution at an AGM to ban the keeping of pets, restrict sub-letting, alter parking arrangements, etc. This is very definitely not the case. Even when the freehold has been acquired by the leaseholders, the existing leases continue to govern the relationship between the Freehold Company and each individual leaseholder. The Freehold Company cannot impose any restrictions on the leaseholders that go beyond the scope of the terms of the lease. With regard to varying leases generally, I would strongly recommend that you buy a copy of a booklet that I originally prepared for FPRA which deals in some detail with varying leases; it is available from the Office for £10. It is not an appropriate use of my time to go over these points in reply to each and every letter that enquires about varying leases. Acquiring the freehold will make it easier to vary your leases in that it would be difficult, though not impossible, to vary leases if the ground landlord were not “on board”. The most straightforward way of varying leases is by unanimity: all the leaseholders and the Freehold Company sign appropriate Deeds of Variation, which are then registered at the Land Registry. This may, however, simply not be possible. If you cannot achieve unanimity, you can also vary all the leases under section 37 of the Landlord and Tenant Act 1987 by an application to the Leasehold Valuation Tribunal. Any such application must be supported by at least 75% of the parties and must not be opposed by more than 10% of the parties. Owning the freehold gives you an advantage if you are seeking variation, as the landlord counts as one of the parties. So the majority viewpoint is likely to be able to bring the landlord on board as well. If you have 14 leaseholders you have 15 parties, including the landlord. So at least 12 parties (which could be 11 leaseholders, plus the landlord) must therefore support the proposed variation, and no more than one leaseholder must oppose the proposal (if 2 leaseholders opposed the proposal, it would be opposed by 13% of the parties). I am not aware of any cases where leaseholders have got leases varied to restrict sub-letting by using s 37 LTA 1987, though in principle it should be possible. The Act says that leases should not be varied if the variation would “substantially prejudice” any leaseholder, and an award of financial compensation would not be adequate recompense. This latter provision is unlikely to apply here: it is more likely to be relevant where, e.g., the addition of an extra storey prejudices the leaseholders on the existing top floor, or an alteration to parking arrangements prejudices one or more leaseholders. Another course of action which might be worth considering is for those who are willing to have their leases amended to go ahead with it, in the hope that when the flat(s) owned by the dissenter(s) eventually change hands a future owner may be prepared to come on board. Members may, however, be unwilling to impose such restrictions upon themselves if not all are willing to do so. On the other hand, I have heard anecdotal evidence of higher prices being attained in a block which bars sub-letting compared with those attained in an identical block which does not, so there may be an advantage in making substantial progress towards the eventual aim of a block where sub-lettings are restricted.

Controlling sub-tenants after buying the freehold

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