knowledge 13 January 2020 |

New Legislation Brings Clarity for Tenants Buying Out Ground Rents

In what context does the question of buying out ground rents arise?

Where title to property is held under a long lease which is close to expiry or which contains covenants restricting use or development, one way to improve that title and remove any restrictive covenants is to buy the landlord’s interest (also referred to as “buying out the ground rent”). While there is always the possibility of reaching an agreement to buy the landlord’s interest, this requires the landlord to be willing to agree and often comes at a price. This is where the Landlord and Tenant (Ground Rents) (No. 2) Act 1978 (the “1978 Act”) comes into play, granting a legal right to tenants to buy out their ground rent if they satisfy certain conditions. There is a price payable, determined in accordance with formulae set out in the legislation, but if the tenant can avoid the uncertainty of commercial negotiation and instead satisfy the conditions set out in the 1978 Act to avail of the statutory procedure, this can be a much more reliable and cost effective solution for the tenant.

What has prompted the 2019 Act?

The 2019 Act is a direct response to the Supreme Court decision in the case of Shirley and JES Holdings Ltd –v- A O’Gorman & Co Ltd [2012] IESC 5 (the “Shirley case”). The Shirley case involved an interpretation of the conditions set out in the 1978 Act in a way that denied the tenant in that case the right to buy the freehold. The 2019 Act directly addresses the provisions of the 1978 Act that led the Supreme Court to its decision in the Shirley case to avoid the potential for the same interpretation to occur again.

What changes have been made by the 2019 Act?

To establish a right to buy out a ground rent involves a very technical analysis of the legislation, the lease and the relevant facts and circumstances. Fundamentally, tenants need to satisfy all of the conditions of s9 of the 1978 Act and one of the alternative conditions in s10. The conditions are framed to effectively reward tenants with the right to buy the ground rent where tenants have constructed buildings and carried out works which have added value to the land. This briefing is not a summary of the law in this area but confines itself only to those aspects of the legislation that have been amended by the 2019 Act.

Section 9 clarification

Up to now, under s9, tenant works to alter or reconstruct existing buildings do not qualify to entitle the tenant to buy out the ground rent unless the buildings “lose their original identity.”  This aspect of s9 hasn’t fundamentally changed although it is now more directly and positively expressed. In the Shirley case however the fact that some of the original buildings were still identifiable had caused the High Court to query whether this condition had been met and the 2019 Act now sets out, for the first time, various matters that can be taken into account by a ground rents arbitrator in determining this. In particular it provides that an arbitrator cannot refuse to hold that buildings have lost their original identity by reason only of the fact that a part or parts of the original buildings remain identifiable.

Section 10 clarification

One of the alternative conditions to be satisfied by an applicant tenant, s10(2), has three components:

1. that the lease is for a term of not less than 50 years;

2. that the yearly rent is less than the rateable valuation at the date of the service of the notice to acquire the freehold; and

3. that the permanent buildings on the land were not erected by the landlord or the landlords predecessors in title.

In respect of component (3) there is a presumption that the buildings were not erected by the landlord or the landlord’s predecessors, which the landlord must rebut.

In the Shirley case the Supreme Court held that the landlord could count tenants under previously expired leases as the landlord’s predecessors in title for the purposes of rebutting the presumption that the landlord and the landlord’s predecessors had not built the property. This gave much greater scope to landlords to rebut the presumption than ordinarily understood. The 2019 Act now effectively reverses this by making it expressly clear that in rebutting this presumption, the landlord is not entitled to claim tenants under expired leases as among the landlord’s predecessors in title.

The 2019 Act also takes the opportunity to update and amend the proofs required to satisfy the rateable valuation (“RV”) test (in component (2) above) to include a certificate of the Valuation Commissioner by reference to historic RVs rather than current RVs.

Conclusion

The 2019 Act is not ground breaking by any means. The hurdles for tenants to jump remain and the technical analysis will continue.  But as development continues apace in Dublin, developers, in particular, will welcome the clarity that the 2019 Act brings.