Use it or lose it

Local authorities looking to sell off assets linked to schools or public facilities should be aware that trying to change the purpose of land could result in it being taken back by estate. Michael Fahy explains how reverter clauses work

With the existing prevailing chilly economic wind about to drop several degrees, local authorities will be subject to the temptation to raise additional funds from the disposal of 'surplus' assets.

Should those assets include any land linked to schools or facilities such as libraries, alarm bells should ring loudly in advisers' ears in case there is a reverter clause lurking in the background. This provides that should the land not be used for the purposes for which it was given '“ for example, a school or library '“ the land must revert back to the original owner or its successor-in-title.

While these clauses are not especially common, there are lots of pieces of land subject to reverter clauses and, if they apply, they must be adhered to.

I recently advised a client concerning a public library, the land for which was given to a local authority, subject to a condition that it was only to be used as a public library. The local authority in question wished to use the land for an alternative use and my client insisted on its rights pursuant to the reverter clause being complied with.

This case has resulted in considerable delay to the local authority's proposed alternative use; additional costs for professionals in the guise of solicitors and surveyors fees; and the likelihood of a substantial payment or return of the legal estate in the land.

Reverters are something of an esoteric subject and not something that practitioners will come across very often in their careers.

The original transfer of land will often have been pursuant to a statute such as the School Sites Act 1841 or, in the case above, the Literary and Scientific Institutions Act 1854. The dates of these Acts provide an inkling of the need to carefully check your client's title to any land if advising a school or a local authority on a sale, lease or proposed change of use.

The land may not necessarily be transferred pursuant to a statute, but if it was '“ and in most instances it will be '“ the provisions of the Reverter of Sites Act 1987 (as amended by the Trusts of Land and Appointment of Trustees Act 1996) will apply. Under the Act, the land will be held subject to an implied trust for the benefit of the beneficiary (the original owner or its successors-in-title).

If the beneficiary cannot be traced or it consents, an application can be made to the charity commissioners to make the land the subject of a scheme which, if granted, will have the effect of extinguishing the rights of beneficiaries under the trust. If the land was not transferred pursuant to a statute, the land will '“ if the use ceases '“ revert back to the original owner or its successors in title.

Practical effects

If the land, the subject of the reverter, ceases to be used for the original purpose and is either sold or leased to a third party, the net proceeds of sale (after payment of costs), or rent and profits (after payment of rates, taxes, costs of insurance, repairs and other outgoings) are held on trust for the benefit of the beneficiaries under the trust.

The above is subject to a caveat that the Act will not confer any rights on any beneficiary if the claim is, before the commencement of the Act, statute barred. If the land is not currently being used for the original purpose, it is therefore essential to check when the original use ceased to ascertain whether any potential claim is statute barred.

Challenging the validity

It is a moot point as to whether a reverter clause can be challenged under section 84 of the Law of Property Act 1925. Under section 84, a 'person interested in'¦ land affected by any restriction'¦ as to the use thereof or building thereon'¦' may apply to have the restriction removed or modified.

The unresolved issue in this instance is whether the reverter can be said to relate to title as opposed to the user of land or buildings. If it is the former, the Lands Valuation Tribunal will have no jurisdiction under section 84 of the Law of Property Act 1925 to consider an application. If it is the latter, the Lands Valuation Tribunal has yet to confirm the answer to this question, but another barrier is whether the restriction amounts to a condition subsequent which, if it did, would oust the jurisdiction under section 84 of the 1925 Act to consider a challenge on the enforceability of a reverter clause.