A white knight in shining armour

What is a white knight? The dictionary definition of a white knight is “a person or thing that comes to someone’s aid”.

How might a white knight come to the aid of a group of leaseholders seeking to acquire the freehold interest in their building pursuant to their statutory right under the Leasehold Reform, Housing and Urban Development Act 1993?

A group of leaseholders who cannot afford to acquire their freehold without help from outside investors will look for a white knight.

Being a white knight in these circumstances can secure the prospect of a capital return with tax benefits, which makes these investment opportunities very attractive.

Many white knights have contact with solicitors and valuers with specialist expertise in the leasehold reform legislation who can broker the introduction. Those solicitors and valuers will identify where the leaseholders have a funding issue, which arises when not all of the leaseholders want, or can afford, to participate in the acquisition and the others are not able or willing to pick up the shortfall, whether collectively or individually.

The white knight will cover the percentage of the freehold price attributable to the leasehold interests in the flats owned by the non-participant leaseholders. Very often their leases have short unexpired terms, which means that the contribution towards the freehold price attributable to their flats can be high, and so those leaseholders are priced out of the opportunity to join in the claim. The white knight steps into their shoes and funds their proportion of the price, discounted from that which the participant would otherwise have to pay.

In return the white knight will be granted 999 year leases of the flats they are funding with the prospect of receiving a capital sum, with the likelihood of a windfall if and when the occupational leaseholder makes a statutory claim to extend the lease of their flat, which claim can properly be made against the white knight as the owner of the 999 year lease that sits above their interest.

What are the tax benefits?

The Stamp Duty Land Tax (SDLT) payable on the freehold price is calculated in a way that affords relief to the leaseholders, who will usually expect the white knight to pay its share of the SDLT attributable to the flats that they are funding. Furthermore, the white knight will be entitled to Capital Gains Tax (CGT) relief on the capital received when the leaseholder claims an extended lease, provided that the capital is reinvested in other property within a specified period. Many choose to hold on to their interest following an extended lease claim. Others assign their 999 year lease to the leaseholder at the same time as granting the extended lease. Care needs to be taken in the latter case to ensure that the CGT relief is preserved.

Whilst the white knight will sometimes be given a share in the freehold company, this is not the driver behind the white knight’s involvement. A share in the freehold is essentially a right to vote in the running of the freehold company, which is not usually of concern to a white knight. Ownership of a valuable virtual freehold asset is what matters.

In the unlikely event that no extended lease claim is made by the occupational leaseholder, there is always the possibility of obtaining vacant possession of the flat or at least a market rent from the leaseholder when the lease eventually expires.

“White knighting” opportunities are, for obvious reasons, compelling to both leaseholders and prospective investors and are more prevalent than might be expected, particularly in the current market.

If you wish to discuss this topic further or have any other questions, please contact Katherine Simpsons or any member of the Edwin Coe Property team.

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