What happens when the freeholder not just disappears, but the very freehold itself ceases to exist?We know from case law that when a freehold escheats, the derivative interests such as mortgages and leases survive, however a leasehold interest without a reversionary freehold interest is bound to create problems. Whilst this is a modest residential case, the same principles apply to commercial property.
Background
The Lulhams (the"Claimants") had acquired 40 Kingsley Road, Maidstone (the"Property") in 2005 through their company (the"Company"). The Company bought the freehold interest in the Property, while the Lulhams took long leases of Flats 1 and 2 in the building—Mrs. Lulham as sole lessee of Flat 2, and both jointly for Flat 1.
Unfortunately, the Company failed to file its annual returns and was struck off the Register of Companies in 2010. The judgment records that the Claimants had outsourced the responsibility for filing returns and other company secretarial matters to a firm of solicitors which had subsequently ceased to practice. No restoration of the Company had been attempted within the six-year statutory window and, as a result, the Company ceased to exist.Undersection 1012 of the Companies Act 2006(the"Act"), its assets—the freehold in the Property—became bona vacantia, passing automatically to the Crown.
In 2022, the Treasury Solicitor, which has oversight of bona vacantia, disclaimed the freehold under section 1013 of the Act. The act of disclaimer meant that the doctrine of escheat applied, a common law rule whereby the freehold reverts to the Crown as ultimate owner of all land in England.
This left the Claimants in a precarious position: they were leaseholders, but their freeholder no longer existed—and the Crown, represented by the Crown Estate, having disclaimed the freehold, refused to manage or regrant it, which is common practice for the Crown Estate.
The Application
The Claimants applied to the High Court for an order vesting in them the freehold of the Property, relying on two statutory routes.
The first was under section 1017 of the Act , which gives the court the power to vest disclaimed property in someone who either has an "interest" in the property (ground (a)) or who has liabilities in respect of the property (ground (b)).
The other was undersection 181 of the Law of Property Act 1925, which gives the court the power to create and vest a corresponding legal estate where a company's estate has "determined" due to its dissolution.
The Companies Act application
The court dismissed the application under section 1017(1)(a) of the Act on the ground that the Claimants had no qualifying "interest" in the freehold. While they were directors and sole shareholders of the Company and had funded the purchase of the freehold of the Property, this did not give them any legal or equitable interest in the freehold itself.
The independence of the Company as a legal entity separate from its shareholders, officers and employers was established late in the nineteenth century in the leading case ofSalomon v A Salomon & Co Ltd[1896].The principle has been regularly safeguarded by the courts ever since.The leading case ofPrest v Petrodel Resources Ltd[2013], cited in this case, restated that piercing the corporate veil would only be justified where there was evidence of fraud or impropriety, which was not present on the facts.
The court therefore declined to attribute the defunct company's freehold interest in the Property to the Claimants, because that would necessarily involve an unjustified piercing of the corporate veil.Surprisingly, perhaps, the Claimants did not put forward the resulting trust argument that had been successful inPrest.The Claimants' argument could have been that they had provided the funds for the Company to acquire the freehold interest in the Property, and therefore the Company held the freehold acquired with those monies on resulting trust for the Claimants.Given that the resulting trust argument inPresthad been Lord Sumption's elegant workaround to compromise the conflict between family law and company law, this might have provided a route to achieve a pragmatic solution.
The second limb of the claim was based on section 1017(1)(b) of the Act.The Claimants argued that they were entitled to the freehold as a form of compensation for their continuing liabilities under their leases, such as ground rent and service charges.
The court acknowledged that the Claimants remained subject to the lease obligations. However, under section 1017(3) of the Act, a vesting order on this ground may only be made where it would be "just... for the purpose of compensating the person subject to the liability in respect of the disclaimer."
This meant, the court held, that there had to be an appropriate relationship between the burden of the continuing liability and the benefit of receiving the freehold. The ground rents and service charges on this small terraced house were modest, whilst the freehold, if reinstated, would have a significant value—especially as the residue of the terms of the leases was reducing over time.The Claimants were therefore unable to bring themselves within the scope of the Act.
Section 181 of the Law of Property Act 1925
Finally, the Claimants applied under section 181 of the Law of Property Act 1925, which gives the court power to 'recreate' a lost legal estate and vest it in someone "who would have been entitled to the estate which determined had it remained a subsisting estate".
The problem for the Claimants was that leaseholders have no such right against a freehold estate.They have a derivative interest only, which has been held to survive the escheat of the freehold, but does not give them any claim on the underlying proprietary right.The court rejected their claim.
Our Comments
It is difficult not to feel sympathy for the Claimants, even if they were, to a limited extent, architects of their own misfortune through not actively managing or monitoring their Company.However, a similar set of facts is possible where landlord and tenant are not connected and could give rise to a number of issues.So for example, a tenant with security of tenure under the Landlord & Tenant Act 1954 would not be able to apply for renewal of its lease if there were no freeholder to whom the application could be made. Even simple property management issues such as obtaining licences for alteration or alienation would not be possible.Similarly, break notices could not be served.Any financing or refinancing would be extremely difficult as funders would be wary of lending against a title with this defect.
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