7.3 Trusts and Joint Ownership - Lease Extensions
Trusts in the Context of Leasehold Property
Leasehold flats can be held under various trust structures, such as family trusts, where trustees hold the legal title for beneficiaries, or bare trusts in bankruptcy or estate administration scenarios. Under the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993), Schedule 14, Paragraph 9, a new lease granted pursuant to a Section 42 notice (Tenant's Notice claiming a new lease) must be held on the same trusts as the existing lease, ensuring continuity of beneficial interests. The landlord is not concerned with how the premium is applied among trustees or beneficiaries, focusing solely on the grant of the lease.
Newly appointed trustees can apply for a lease extension, provided they meet the qualifying criteria as successors to the previous trustees. For instance, personal representatives of a deceased leaseholder who satisfied the (pre-2025) two-year ownership rule at death may claim within two years of probate or letters of administration. However, a trustee in bankruptcy cannot rely on the bankrupt's prior ownership period, as the estate vests automatically in the trustee without formal transfer.
Tax implications add another layer, particularly for service charge trusts in leasehold flats, where contributions may be held in trust by landlords or management companies. Reforms under LFRA 2024 may impact these, but under LRHUDA 1993, such trusts can complicate lease extensions if disputes arise over fund management or beneficiary rights.
Challenges in Trusts
- Authority to Act: Trustees must have unanimous agreement to serve a Section 42 notice, as the Act treats the trust as a single entity. Dissent among trustees could lead to court applications for directions under the Trustee Act 2000.
- Beneficiary Interests: Where beneficiaries have equitable interests, ensuring the extension benefits the trust without prejudicing them is crucial. Case law is sparse, but principles from property trusts suggest courts prioritise the trust's overall purpose.
- Missing or Incapacitated Trustees: If trustees are untraceable or lack capacity, leaseholders may need to apply to court for vesting orders under Section 50 of LRHUDA 1993, which can delay proceedings.
Multiple Leaseholders and Joint Ownership
Defining Joint Ownership under LRHUDA 1993
Joint ownership occurs when multiple individuals hold the lease as joint tenants or tenants in common. Under LRHUDA 1993, there can be only one qualifying tenant per flat at any time, typically the holder of the most inferior lease if multiple interests exist. For joint tenants, all are equally entitled to the whole property, but the Act's interpretation is ambiguous regarding whether one joint tenant can unilaterally apply for an extension. No definitive case law exists on this point, creating uncertainty.
Schedule 3, Part II, Paragraphs 12 and 12A require qualifying tenants (including joint ones) to provide copies of the initial notice to the reversioner and other relevant parties, imposing collective procedural duties. Schedule 11, Part I, Paragraphs 1 and 2 allow notices to be served on any landlord, with copies to others, facilitating multiple interests but requiring coordination.
Challenges in Joint Ownership
| Challenge | Description | Relevant Provisions/Case Law | Practical Implications |
|---|---|---|---|
| Consensus Requirement | All joint tenants must agree to the extension, as the Act does not permit unilateral action by one party. | Ambiguous under LRHUDA 1993; no case authority yet. | Disputes may necessitate partition actions or court intervention, delaying the process. |
| Notice Serving and Coordination | Notices must be signed by all joint tenants under Section 99(5)(a), and copies distributed to multiple landlords if applicable. | Schedule 11, Part II, Paras 6-7: Competent landlord's acts bind others, but independent actions possible. | In multi-leaseholder buildings, overlapping claims (e.g., collective enfranchisement) can suspend individual extensions. |
| Qualification Issues | If one joint tenant lacks qualification (e.g., owns three or more flats), the entire claim may fail. | Schedule 3, Part I, Para 16: Tenant must qualify at relevant date. Excludes business leases or charitable trusts. | Joint owners must verify all meet criteria; sub-leases add complexity. |
| Assignment and Sale | The benefit of a Section 42 notice can be assigned with the lease, but in joint ownership, all must consent. | Section 43(5): Assignment valid if simultaneous with lease transfer. | Useful for sales during process, but requires joint agreement. |
| Costs and Premiums | Joint owners share the premium and landlord's costs, potentially leading to disputes over apportionment. | Premium formula under Schedule 13; costs from notice date. | Participation agreements recommended to outline shares. |
Joint Tenancy and the Effect of a TR1 Transfer
The Section 42 Notice and Assignment Requirements
When joint tenants serve a Section 42 notice and later transfer the lease to one of them, the transfer of A’s interest to B via TR1 is an assignment of part of the leasehold interest. To comply with Section 43(3), the benefit of the notice must be assigned with this transfer to avoid withdrawal.
Why a Deed of Assignment Is Essential
A deed of assignment is required to explicitly transfer the rights and obligations of the Section 42 notice alongside the leasehold interest. Without it, the notice risks being deemed withdrawn, halting the lease extension process. Here’s why:
- Legislative Compliance: Section 43(3) mandates that the notice’s benefit must accompany the lease assignment. A TR1 alone transfers the leasehold interest but does not automatically include the notice’s rights, as these are distinct statutory entitlements. A deed ensures the benefit is expressly assigned to B, preventing separation.
- Standard Practice: Conveyancing guidance (e.g., from Practical Law and specialist solicitors) recommends executing a deed of assignment contemporaneously with the TR1. The deed typically includes provisions for cooperation, any deposit paid under Section 42(6), and notice to the landlord, ensuring clarity and compliance.
- Risk of Withdrawal: If the TR1 is completed without assigning the notice’s benefit, the landlord could argue the notice has been withdrawn, as the lease was assigned separately. This could lead to significant delays, as a new notice cannot be served for 12 months (Section 42(8)), potentially increasing costs due to changes in property valuation.
Timing Is Critical: No Post-Transfer Assignment
The deed of assignment must be executed contemporaneously with the TR1 transfer, typically on the date of completion (when funds are exchanged, and the TR1 is dated). Signing the deed after the transfer is completed is ineffective and risky for the following reasons:
- Section 43(3) Requirement: The phrase "assignable with" implies the assignment must occur simultaneously with the lease transfer. A post-transfer deed means the lease was assigned without the notice’s benefit, triggering deemed withdrawal as of the transfer date.
- Case Law Support:
- Aldavon Company Ltd v Deverill [2000] Ch 383 (Court of Appeal): A backdated deed of assignment was held invalid because the lease was assigned without the notice’s benefit at the time of transfer. The court ruled the notice was deemed withdrawn, emphasizing that assignments must be genuine and contemporaneous. Post-transfer attempts to rectify this were ineffective.
- Typeteam Ltd v Acton and Lea [2007] EWHC 3174 (Ch): The court upheld an assignment executed on completion, even if equitable pending registration, but stressed the need for legal assignment at the time of transfer. This reinforces that post-transfer deeds do not comply with Section 43.
- Practical Risks: A delayed deed could lead to landlord challenges, invalidation of the claim, and liability for costs (e.g., under Section 60 for the landlord’s valuation and legal fees up to withdrawal). The assignee would need to restart the process, potentially facing a higher premium.
Mitigating the Risks
To avoid these pitfalls, joint tenants should:
- Execute a Deed Contemporaneously: The deed of assignment should be signed on the same day as the TR1 completion, specifying it takes effect upon the lease vesting in the assignee (e.g., upon HM Land Registry registration for registered leases).
- Incorporate into TR1: In some cases, the TR1 can include clauses assigning the notice’s benefit, though a separate deed is often clearer and preferred.
- Serve Notice on the Landlord: Promptly serve a copy of the deed on the landlord to bind them to direct counter-notices or proceedings to the assignee.
- Register with HM Land Registry: Both the TR1 and deed should be registered to protect the assignee’s interest and ensure legal title reflects the assignment.
Summary of Risks of Transfer of Ownership
Transferring a leasehold flat from joint tenants to one sole tenant via a TR1 terminates the joint tenancy, as it eliminates co-ownership rather than severing it into a tenancy in common. However, this transfer poses a significant risk to a Section 42 notice under LRHUDA 1993 if the notice’s benefit is not assigned concurrently. A deed of assignment, executed at the time of the TR1 completion, is essential to comply with Section 43(3) and prevent deemed withdrawal. Post-transfer assignments are invalid, as established in cases like Aldavon v Deverill. Tenants must plan carefully, ideally with a specialist leasehold solicitor, to ensure compliance and protect their lease extension claim. For further details on the legal framework, see Assigning the Benefit of a Section 42 Notice.