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The importance of participation agreements

By Kavita Bharti

July 2017

The recent High Court case of Parkes v Wilkes [2017] EWHC 1556 (Ch) highlights the importance of making clear your intentions from the very beginning when it comes to buying the freehold of your building. If you intend to extend the lease on your flat or vary the terms of your lease when buying the freehold it is important to make this clear to your co-freeholders from the outset The case was an appeal from a County Court.

Background

The County Court

Ms Parkes’s argument

Mr Wilkes’s defence

Judgement

The judge whilst accepting that the court had the power under trust law to make the order, rejected Ms Parkes’ case that there was a common intention to freely grant new leases. He held:

  1. the Declaration of Trust was clear and set out the contract with regards their co-ownership, which was to hold the freehold in equal shares.
  2. The grant of a 999 year lease would, impact the value of the trust asset.
  3. Ms Parkes has the ability to extend her lease using the 1993 Act.

Appeal to the High Court

Ms Parkes sought permission to appeal on a number of grounds, but mainly the fact that the purchase of the freehold was made as a collective enfranchisement and as a result, the purchase price had been determined reflecting “marriage value”. Permission to appeal was granted on the basis that the collective enfranchisement / marriage value point had a real prospect of success.

In dismissing the appeal, the High Court considered (amongst other issues):

  1. collective enfranchisement and marriage value; and
  2. whether or not the judge in the original matter was wrong to consider the alternative remedy of a lease extension under the 1993 Act.

Collective enfranchisement  

Ms Parkes submitted that the price paid by the parties in pursuing collective enfranchisement was, to a significant extent, attributable to “marriage value”. Basically, marriage value reflects the latent value attributable to bringing together the leases with the freehold. It is recognition of the consequential increase in value of the freehold in the leaseholder’s hands. This is because once they have acquired the freehold they can grant themselves new leases for no premium and for very long terms.

The declaration of trust was considered and it was found to be simple and clear and did not recite any specific purpose. The judge could see no basis to imply that the purpose of the trust was to extend the lease for no premium.

Statutory lease extension

As mentioned above, it was also argued that the judge in the County Court was wrong to consider the alternative remedy of a lease extension under the 1993 Act. Ms Parkes argued that this would mean payment of a further premium. Ms Parkes submitted that in effect she had already paid a price which took into account a 999 year lease extension when buying the freehold.

However, the High Court found that the judge’s point in the original decision was not concerned with the fact that the available extension was comparable either in term or price to what the claimant wanted the court to direct under trust law. The judge had simply recorded that there was an alternative route to a 90 year extension available, and it would not be unreasonable for her to use that procedure.

Take aways

  1. Always make your intentions clear from the outset when entering into co-ownership under a trust.
  2. It is strongly recommended that all participating leaseholders enter into a formal participation agreement amongst themselves to govern joint actions prior to and during the collective enfranchisement procedures – rights of voting, the negotiation and agreement of terms and, most important, the individual tenant’s financial contributions. It is also be useful to record in an agreement what will happen after the freehold is acquired, for example, that the new freeholder will grant new leases to all those tenants participating in the purchase.

Further Information:

Podcast: Participation Agreements

Advice guide: Participation Agreements

Share of freehold: when joint owners should consider a declaration of trust

Buying the freehold: set up a co or buy as trustees

Kavita Bharti is a Chartered Legal Executive with over 11 years’ experience in property law. Having previously worked in private practice and for a local authority, she developed specialist knowledge in the conveyancing process and commercial property. She joined LEASE in 2014 and has developed a strong knowledge of leasehold law and property management. She is an experienced legal trainer and has provided training to various housing authorities, housing associations and other professional bodies and regularly contributes content to the LEASE website. As well as advising on all aspect of leasehold and enfranchisement law, Kavita is also LEASE’s Business Development Manager and is a qualified mediator.

LEASE is governed by a board, appointed as individuals by the Secretary of State for the Ministry of Housing, Communities & Local Government.

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