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What is Escheat and How Can it Affect Land and Property Owners?

By Joanna Wooller, lawyer in the commercial property team at Thomson Snell & Passmore

Escheat is a process whereby ownerless freehold land (in England and Wales, with exceptions) may be returned to the Crown. In this article I will be looking at how and why it occurs and how it can affect landowners.

How does freehold land become ownerless?

A good example is an issue I have dealt with recently when acting for a freehold land owner in connection with the sale of their property (“the property”). The property was a commercial unit on an estate of six commercial units constructed in the 1980s. The access into the estate, and to each unit, was by way of a private access road (“the road”). The freehold ownership of the road was retained by the company who developed the estate (“the company”) with a view to repairing and maintaining the access road for the benefit of the owners of the units on the estate (and to charge a service charge for doing so).

The issue of the ownership of the road arose in connection with my client’s sale of the property, at which time it became apparent that the company had been dissolved whilst the title to the road remained registered in its name and that it had not been performing its obligations in relation to the road.

It is likely that the company was a subsidiary of a large group of companies and was no longer used or needed for future development and/or that ownership of the road by the company was overlooked (potentially for many years given that it had not been performing its obligations in relation to the road) prior to the dissolution of the company.

Upon dissolution of the company, ownership of the road passed to the Crown, as the ultimate owner of all land in England and Wales. When this occurs, the Bona Vacantia Division (BVD) of the Government Legal Department will either disclaim the land or sell the land for full market value.

In this case, the freehold title to the road was disclaimed. The road was treated as if it never belonged to the Crown at all and escheated to The Crown Estate to be dealt with. The important distinction here is ownership – The Crown Estate does not own the land, but will ‘deal’ with the issue of the ownerless land in the absence of anyone else being able to.

What type of land is likely to be disclaimed?

The key factor for The Crown when deciding whether to disclaim land is whether ownership of that land will leave it vulnerable to any liabilities and/or risks associated with the ownership of that land. Examples of land which the Crown would be likely to disclaim are:-

· Land used in common, such as private roads, service yards, amenity land, or the common parts of an estate or a block of flats – here, for example, there may be obligations to pay or collect a service charge or ground rent, or to comply with certain obligations or provide services

· The tenant interest in a commercial lease

· Property subject to onerous covenants or other potential liabilities

· Contaminated land or property with dangerous buildings, trees or other items

· Property in negative equity (that is, subject to security for a debt greater than the value of the property)

· Property or assets subject to a dispute or competing claims

· Low value property (the BVD do not appear to be willing to sell land for less than £1,000 plus costs)

What happens after the land is disclaimed?

The freehold title to the land is extinguished (although any registered Land Registry title will not be closed automatically) however any mortgages, legal charges or other encumbrances which might exist against the former freehold interest will continue and carry forward to any sale to a third party.

The Crown Estate may (there is no obligation or time limit requiring it to do so) look to dispose of the land and if no disposal is made the land remains ownerless indefinitely. If The Crown Estate does dispose of the land it is under a statutory obligation to obtain the best value for the disposal, with a minimum value of £5,000. The land cannot therefore be purchased ‘on the cheap’ on the basis that it has been escheated to The Crown Estate.

A consultation process will be followed where an opportunity to participate in the purchase of the land will be given to persons who may have a legitimate interest in its future or who might be adversely affected by its sale – in my example, the owners of the other units on the estate may fall within either category given the importance of the estate road to access their respective units and its ongoing repair and maintenance (the estate unit owners could decide to join together (perhaps to incorporate a company of which they are directors or members) to purchase the estate road) – or in the absence of any persons, The Crown Estate would give an appropriate person or body the opportunity to purchase the land.

In addition to the purchase price for the land, any potential purchaser will need to contribute towards The Crown Estate’s legal costs and a market appraisal for the land which, in a straightforward case, start at £3,500 plus VAT, in addition to their own legal costs and other expenses relating to the purchase.

How could it affect land owners?

In my example, the fact that the road had escheated to The Crown Estate had cost implications for my client and caused a significant delay to the progress of their sale (whilst we investigated the issue and liaised with The Crown Estate and the Land Registry). My client’s issue was complicated by a restriction being registered against their freehold title in favour of the company which prevented a disposal of the property without the involvement of the company, which was rendered impossible.

The Crown Estate will not take any actions which might be construed as acts of management, possession or ownership of any disclaimed land. The reason for this is that The Crown Estate should not be the guarantor or last resort for companies/individuals who have failed and left behind onerous property, the cost of which would ultimately be a burden on the public purse. Given the triggers for disclaimer highlighted above there are clearly many examples where disclaimed land could have an adverse impact on landowners:-

– Neighbouring land is contaminated and no action is taken

– Access is required over the disclaimed land but it has fallen into disrepair, potentially preventing access, potentially affecting trade

– Land comprising common parts of a block of flats is disclaimed, payment for services supplied to those common parts is not made and services cease

How can landowners avoid this trap?

If your land neighbours or adjoins any type of land used in common, as described above, if you are the landlord of a commercial lease (regardless of the length of the lease term) or if you require access over neighbouring land to access your property then you should consider whether there are any red flags for concern and monitor the situation carefully – is the tenant or land owner carrying out their obligations such as to repair and maintain an access road or

property? Is the neighbouring land falling into disrepair which could lead to contamination or property damage issues such as dangerous trees? Is there Japanese Knotweed on the land which is not being controlled/eradicated which could affect your property? These red flags could mean that, in the event of the company land owner being dissolved, the Crown would be likely to disclaim the troublesome land.

If there are any areas of land which you might have concerns about then in the first instance you could raise enquiries of the Land Registry to establish ownership and, if the land is owned by a company, investigate the status of the company at Companies House (e.g. whether they are up to date with their company filing). My advice would be to do so at an early stage so that you could look to avoid the land escheating to The Crown Estate and the associated costs with acquiring the land in that way.

Alternatively, please do feel free to contact me and I would be happy to assist you