Split reversions: potential pitfalls

Split reversions: potential pitfalls

Published:

Author: Alison Howarth

Applies to: England and Wales

It is easy to create a split reversion but the consequences and complications that follow need to be considered carefully.

Split reversions arise where a single landlord sells part of its title to a property that is let to a third party or, where two or more landlords own separate parts of a property and let them by means of a single lease.

In either case the tenant finds itself with one lease and at least two landlords. Legislative rules which govern split reversions differ according to the date of the tenancy, and the statutory regime that is applicable. However, whichever rules apply, they will not adequately address the commercial concerns of the parties.

Before agreeing to sell part of a reversion or entering into a lease with a split reversion, a landlord or buyer should ensure that they address these commercial concerns to maintain appropriate control of, and value in, an investment.

The key issues are outlined below:

Apportionment

Landlords need to agree how rent and other liabilities are to be apportioned between them. There is some help in statute and in standard conditions of sale but these provide a 'fallback' only and fail to address a number of the commercial issues and interests that should be addressed.

It will generally be preferable to ensure that the tenant pays a proportion of rent to each landlord rather than all the rent to one landlord with the other then being dependent on it for a share of that rent.

Future rental issues need to be addressed. Who is to implement any future rent review? How that is to be managed? Assuming an increase at some point, how is that to be apportioned?

How are other obligations and responsibilities to be shared? Who is to be responsible for what? Is it sensible to run two service charges or one? If one, which landlord has which responsibilities under it? If two, who does what and will any services be provided jointly? Who will insure the building? Who will deal with applications for consent?

It will usually be advisable for the landlords to enter into a deed of apportionment in relation to leases that are already in place in order to expressly consider and agree all of these issues. For new leases, these issues can be addressed in the terms of the lease.

Property owners are advised to join their tenant into any deed of apportionment to be sure that it too, knows and is bound by the arrangements for how the property is to be managed and to whom it should pay its rent.

Security of tenure

Where the reversion is split, the Landlord and Tenant Act 1954 (as amended) provides that the "landlord" consists of all the owners collectively. Therefore statutory notices, counter-notices and applications must be served and made collectively.

This does not address issues faced when multiple landlords are uncooperative or are in disagreement about whether to grant a renewal lease.

In the 2011 case of EDF Energy Networks (EPN) Plc v BOH Ltd the court confirmed that a section 25 notice needs to be served by all landlords together where there is more than one. Particular difficulties had arisen because one of the joint freeholders was also tenant of the property and so its interests were quite different to those of the other owners.

Unilateral rights

Joint landlords need to be aware that they each have powers, the exercise of which could jeopardise the other's interest in the reversion.

An example of this is section 140 of the Law of Property Act 1925 which applies to older tenancies. It entitles either landlord to forfeit a lease in respect of that part of the demise falling within its ownership without the approval of the other. Where this is done the tenant has the power to serve a counter-notice on the other landlord by which it can terminate the remainder of its lease. This statutory provision relates to options to quit too and so could extend to break options also.

By these means, the unilateral actions of one landlord could spark a chain of events that determines the entire lease.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.