While the risks described in this article can affect all leaseholders, they are of particular concern to those holding significant leasehold interests in residential developments including registered providers, build-to-rent investors and their funders (together, “Leaseholders”). Individual leaseholders may also be affected, though many of the practical mitigations may not be relevant to them.
When a company is dissolved or struck off the register, any property, rights or assets vested in it immediately before dissolution will pass automatically to the Crown as bona vacantia (meaning “ownerless goods“).
This article briefly sets out the bona vacantia process and potential consequences in the residential development context.
What is Bona Vacantia?
For the most part in England and Wales, matters will be dealt with by the Bona Vacantia Division of the Government Legal Department (BVD), acting on behalf of the Crown. The BVD is represented by the Treasury Solicitor and will decide whether the Crown wishes to retain or disclaim the property. If the BVD decides to retain the asset, it will remain vested in the Crown, but there is no requirement for it to register itself as the registered proprietor. Guidance published by the BVD also confirms that the division is not responsible for the management or maintenance of the property. Generally, its role will then be to sell the property at its full market value.
Properties that are problematic, of limited value or carry significant liabilities will usually be disclaimed. This commonly includes leases granted at a rack rent, which are deemed a liability by the BVD. Where property is disclaimed, it is treated as if it never passed to the Crown.
The process which follows a formal disclaimer by the Treasury Solicitor depends on whether the land in question is freehold or leasehold.
Freehold
Where the property being disclaimed is freehold land, it will typically be subject to a process known as escheat. If freehold land is disclaimed it will escheat to the Crown, the freehold interest will be extinguished and the Crown Estate, which administers escheat land on behalf of the Crown, may (but is not obliged to) dispose of the property to a suitable purchaser, with a statutory duty to obtain the best possible price for such a sale.
Leasehold
If the property being disposed of is leasehold the BVD has the same options to either retain or disclaim. If the BVD elects to disclaim, the leasehold interest will be extinguished. Importantly, this does not automatically destroy the rights of third parties. Such parties may have rights that need to be addressed through the statutory vesting order procedure. The Crown does not ‘step into the shoes’ of any dissolved company in the way that a liquidator or administrator does. Instead, it takes any beneficial property and rights which the company owned as a successor in title.
The missing chargeholder
As bona vacantia extends beyond freehold or leasehold interests, the Crown may become entitled to the benefit of a mortgage, charge or charging order where the original beneficiary has been dissolved. Any monies owing to the dissolved company under the relevant security, together with accrued interest, will vest in the Crown as bona vacantia. In practice, BVD will typically require evidence that the secured debt has been repaid in full before consenting to the discharge of the security or its removal from the register.
Where BVD determines that the charge does not give rise to any beneficial asset, it will disclaim any bona vacantia interest in the charge and will neither consent to nor object to any application relating to it. Once evidence of the Crown’s position has been provided to HMLR, the charge will be removed from the registered title.
The Missing Freeholder
Developer special purpose vehicles with limited covenant strength (SPV) are commonly used to hold the freehold of residential developments during the build and sales period. Once all units are sold, the SPV may have no continuing commercial purpose. If the freehold reversion has not first been transferred to a residents’ management company or other appropriate entity, any dissolution of the SPV could cause it to vest in the Crown. The leasehold interests beneath survive but there is no functioning freeholder. If rent is being paid under a lease, it is technically owed to the Crown until the reversion is sold or the Crown disclaims their interest.
The consequences for a Leaseholder holding a lease within such a development structure are immediate. Insurance may lapse, management services may cease to function and consents required under the lease may be unobtainable. The BVD will not step in as property manager.
The BVD does operate a procedure for selling the reversion to participating lessees or a management company, but it may also disclaim the interest and a disclaimer extinguishes the reversion leaving a considerably harder position to resolve.
Where a Leaseholder is acquiring units in a development where the freehold sits with a SPV, it should consider requiring the SPV to enter into an agreement to transfer the freehold reversion to a management company once the final unit is sold as part of the acquisition process.
Ownerless Land Project
The Law Commission has recognised the wider difficulties where there is no freeholder. Its Ownerless Land Project is examining whether the current framework provides adequate mechanisms for affected parties to acquire land vested in the Crown following dissolution, and whether reform is needed. The project has identified residential leasehold structures as a context in which the absence of a freeholder causes particular harm. The project can be found here.
The Missing Intermediate Landlord
A different problem arises where the dissolved SPV holds an intermediate lease. For example, a headlease between a freeholder and a Leaseholder’s underlease. If the Crown disclaims that headlease, the Leaseholder’s underlease is not extinguished as section 178 of the Insolvency Act 1986 (as applied by section 1013 of the Companies Act 2006) preserves the rights of third parties, so the Leaseholder’s interest continues, held directly from the freeholder.
The practical difficulty is that service charge and management obligations which ran through the headlease are disrupted. A Leaseholder may be unable to enforce repairing covenants contained in the headlease or may face direct claims from the freeholder on different terms. Its own obligations to its tenants are unaffected and it must continue to perform its landlord functions regardless.
The most effective mitigation is to remove the redundant intermediate interest from the structure while the SPV remains in existence, whether by surrender, merger or direct acquisition.
Building Safety Act
The dissolution of a superior landlord is likely to trigger various Building Safety Act 2022 (BSA) actions.
Accountable Person and Principal Accountable Person status under Part 4 depends on ownership of common parts and relevant repairing obligations and not who is the immediate landlord. If the relevant AP / PAP is dissolved nobody will be carrying out the statutory functions or, more urgently, the statutory obligation may pass to the entity who then holds the legal estate to the structure and exterior of the building structure and/or the common parts. Given the criminal penalties associated with failing to comply with the BSA parties will want to get clarity asap and take all necessary steps to comply where required.
Practical Mitigations for Leaseholders
At acquisition:
- Consider whether any intermediate or superior interest is necessary post-completion.
- Ensure management functions (insurance, repair, service charge collection) sit with an entity which will continue to exist.
- Require the developer to transfer the reversion into a nominated management company.
Ongoing monitoring:
- Maintain a register of all entities in the title chain above each Leaseholder asset.
- Subscribe to Companies House filing alerts so that any proposed strike-off triggers a notification.
- Include corporate status checks in periodic asset reviews.
Where a problem is emerging:
- Object to strike-off – any person may object to a proposed voluntary strike-off by writing to the Registrar of Companies
- Negotiate a transfer – if the company is still active, it may be possible to secure a transfer
Where dissolution has already occurred:
- Administrative or Court restoration – usually available on application within 6 years.
- Acquisition from the BVD – the BVD will often sell freehold reversions and leasehold interests vested in the Crown.
- Act promptly – the BVD may disclaim at any time.