Embassy Court in the Courts

The sale of long leases was a key feature of the growth in UK home ownership in the 1960s and 70s. But imbalances were inherent in the legal frame work that supported this system. In a large block of flats like Embassy Court, the conversion from short to long leases shifts the location of value from the freehold into the leaseholds. But for the freeholder this loss in freehold value is more than offset by the capital gained from selling the new long leaseholds. When this process is complete the attraction of such freeholds is largely as a “reversionary interest” – leases may occasionally be repossessed by the freeholder for various reasons, renewed, and then sold.

A lease is like any contract, it rests on a foundation of common interest between the parties forming it. But this bond of common interest fails if a freehold becomes merely a means to profit via the exercise of repossession. Suspicion, distrust and litigation become the likely outcomes.

In the early 1970s the freehold of Embassy Court was acquired by a mercantile credit company. The purpose of such companies is to raise capital to fund loans to various industries. Between 1973 and 1983 new long leases were created and sold as the old short leases expired. Having liquidated the available capital the freeholders sold up. Successive freeholders in the 1980s found little incentive to struggle with the difficulties of funding repairs in the ageing building. The devalued freehold was simply not worth the effort and most sold on within two years. Financial neglect became the first consequence of this hollowing out of freehold value.  The late 1980s and early 90s at Embassy Court were a period of deficits, qualified accounts and the misuse of reserves collected from the lessees for major repairs. Neglect of the building became inevitable.

The main defence for the leaseholders’ interests lay in the Embassy Court Lessees Association, formed in 1975. This institution became increasingly important as changes to the law gave lessees significant new powers and protections. Changes to the Landlord and Tenant Act in 1985 and 1987 gave new rights to leaseholders. In 1993 the Leasehold Reform and Housing Development Act gave lessees the right to purchase their freehold in certain conditions.

Members of the Embassy Court Lessees Association were negotiating purchase in 1994 when the freehold was abruptly sold  – for the 5th time in 11 years. The new freeholders deftly out-flanked the participating lessees’ attempt at purchase and moved to repossess leases for any breaches of contract. Especially vulnerable were those leaseholders withholding part maintenance payments as a protest against the appalling state of the block and its finances. These repossessions may have seemed unfair but they were not illegal.

These lessees took to the courts and were saved largely by the paucity of the prior accounts. The courts ordered a stay on repossessions while a mass of financial information dating back years was collected and examined. In 1996 further changes to leasehold law strengthened this position; forfeitures could not take place unless a court or a tribunal agreed that maintenance charges were lawfully due.

The cases were now taking years to resolve and the financial stresses were felt by both sides. The freeholders lost a test case in 1997 and ordered to pay court costs and contribute over £70,000 to the maintenance of Embassy Court. The freehold company placed itself in receivership. The freehold was by then so laden with liabilities that even the official receiver disclaimed it. After more legal moves by the former freeholders, the freehold was finally seized by the court and passed to a resident lessee. In 1998 it was passed to Bluestorm Ltd, a not-for-profit company formed and owned by participating members of the Lessees Association for the sole purpose of managing the freehold.

But the real value was, of course, still in the leaseholds. Valuations showed that the leases could be worth eight times their value if the building was restored. The former freeholders had amassed a portfolio of nearly 30 leases in the block. Some had been acquired from their predecessors, others had been repossessed and still more purchased at very low prices from lessees who had been glad of any chance to get out with a cash offer for their un-mortgageable flats. All of these leases had been passed to a separate holding company which had been set up by the former freeholders to hold the leases they controlled.

This holding company now withheld maintenance payments for many of the same reasons as the members of the Lessees Association had formerly withheld theirs. They sought to regain control over the freehold because it meant control over the restoration and therefore the ability to secure the potential value in their leases. To do so this company itself now took advantage of many of the recent changes in leasehold law that had hitherto protected the resident lessees. The result was chaos. No-one expected Bluestorm to survive the ensuing 5 years of litigation. Even Bluestorm’s directors started to see their company as a temporary safe pair of hands while a more secure home was sought out for the freehold.

But Bluestorm did survive. And its position was strengthened by the Commonhold and Leasehold Reform Act of 2002. In a landmark ruling the former freeholders lost their case against Bluestorm at the High Court of Appeal in February 2004. A mere 14 months later the restoration of Embassy Court was complete.

Decades of leasehold reform are enshrined in the story of Embassy Court and it is a mostly refreshing example of the real effects of successful legislation. It is also a wonderful example of what can be achieved by ordinary people acting collectively in the common interest. There are now over 50,000 leaseholder run companies in the UK. They are successful for many reasons but most of all because they are capable of restoring a source of trust between landlord and tenant; the sense of common interest that is the foundation of all contracts and the basis of all enduring leaseholds.

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