Lease – Lessee’s right to acquire the freehold of a property

THE LAW

• Landlord and Tenant (Ground Rents) (No.2) Act 1978

The Landlord and Tenant (Ground Rents) (No.2) Act 1978 (“the 1978 Act”) conferred upon certain tenants the right to buy out the freehold in the property of which they are the tenant. In order to establish a right under the Act, there must be compliance with section 9(1) of the Act and one of the alternative conditions set out in section 10 of the Act.

• Landlord and Tenant (Ground Rents) (Amendment) Act 2019 (“the 2019 Act”)

The 2019 Act amends, inter alia, sections 9 and 10 of the 1978 Act.

Section 9(1) reads:-

This part applies to a person who holds under a lease, if the following conditions are complied with

(a) That there are permanent buildings on the land and that the portion of the land not covered by those buildings is subsidiary and ancillary to them;
(b) That where the permanent buildings comprise, in whole or in part, an alteration or reconstruction, the alteration or reconstruction caused those buildings to lose their original identity;
(c) That the permanent buildings and, where applicable, any alteration or reconstruction referred to in paragraph (b) which caused those buildings to lose their original identity, were not erected in contravention of a covenant in the lease: and
(d) One of the alternative conditions set out in Section 10

Section 9 (5) reads:-

For the purposes of subsection (1)(b) or (c), in considering whether the permanent buildings have lost their original identity the arbitrator-

(a) May have regard to all or any of the following matters-

(i) a change in the use of the buildings,
(ii) the extent of any alteration or reconstruction,
(iii) a change in the character of the buildings, and
(iv) Such other matter as the arbitrator considers relevant,

and

(b) shall not refuse to hold that the buildings have lost their original identity by reason only of the fact that a part or parts of the original buildings are identifiable at the date of service under section 4 of the Act of 1967 of a notice of intention to acquire the fee simple or at the date of an application under Part III, as the case may be.

Section 10(1) reads:-

That the permanent buildings or such of those permanent buildings as have caused the buildings to lose their original identity were erected by the person who at the time of their erection was entitled to the lessee’s interest under the lease or were erected in pursuance of an agreement for the grant of the lease upon the erection of the permanent buildings.

OBSERVATIONS

The main driver for the changes was to allow for a lessee to buy out the freehold where improvements were carried out to the property, such that the property lost its original identity.

However the following are two important implications that arise from the changes:

1. In considering whether permanent buildings have lost their original identity an arbitrator can have regard to a change in the use of the buildings.
2. Section 30 of the Landlord and Tenant (Amendment) Act 1980 gives a lessee a right to acquire a reversionary lease if a lessee meets the criteria set out in sections 9 and 10 above. The term of a reversionary lease would be for 99 years at one eighth of the market rent.

CONCLUSIONS

• A Landlord should consider refusing consent to any improvement works or change of use that may cause a building to lose its original identity, as otherwise a tenant could be entitled to acquire the freehold or a reversionary lease. It would also be advisable for a landlord to regularly inspect their leasehold properties to ensure that a tenant has not carried out any improvement works, or a change of use, without the landlords consent.

• A Landlord when granting a Lease should insert language to ensure that there is a restriction on change of use and that there is a restriction on improvements.

• A landlord should insert language to the effect that it would be reasonable for a landlord to refuse consent in circumstances where it could result in a lessee having a right of enfranchisement against the landlord.

• A Purchaser considering purchasing a property subject to a lease should carefully consider whether a tenant may be entitled to a reversionary lease.

For further information on this topic, please contact Brendan Sharkey on bsharkey@reddycharlton.ie