So we now have the eagerly awaited paper from the Law Commission on their ‘options for reform’ as regards the law on valuation.

What does this mean?

The Law Commission were given the objective of making it cheaper and easier to buy your freehold or extend your lease.

Ultimately that involves a political choice for government about how to do this. Reforming the basis of on which valuations are carried out of necessity means making ‘winners and losers’ between landlord and tenant.

Clearly, given the direction of travel on this the Law Commission have explored various ways to bring down the cost but ultimately recognise that the choice of which path to follow is a political rather than a purely legal decision and as such they have set out three main options which are set out below.

Option 1

Term and reversion – essentially allowing the premium to be calculated by reference to lease length and ground rent only. There would be no marriage value regardless of lease length.

Comment

Essentially this would do away with marriage value entirely and be massively unpopular with freeholders. It might also be open to challenge by freeholders under the Human Rights legislation.

Option 2

Get rid of marriage value and replace it with Hope value.

In other words in cases where the lease has under 80 years the tenant would have to pay only a fraction of the marriage value – as if the fact that the tenant were actually carrying out the transaction was to be disregarded and the freeholder would only get compensated relative to what a third party (who wouldn’t know that the transaction was actually going through) would pay.

Typically hope value is between 10-20% of the full marriage value and so this reform would make it cheaper instantly for the 20-30% of transactions every year that have less than 80 years to run.

Comment

This would be unpopular with freeholders, but less so than option 1 above. Tenants and particularly those with short leases would be very much better off overnight.

The paper discusses how in the case of a freehold the collective might defer ‘hope value’ by agreeing an overage clause with the freeholder meaning that this sort of value would be paid out in the future when and if the development might actually take place.

Option 3

Leave things ‘as they are’ but prescribe certain parts of the calculation.

This has the advantage of brining more certainty, but comes with the extremely political choice of where to draw the line (quite literally, in the case of a relativity curve) or in terms of the specifics of say the capitalisation rate or discount rate. Both of these have been the subject of tribunal decisions, but this could be ‘set in stone’ thereby avoiding argument.

Comment

Option 3 is essentially the ‘status quo’ with some tweaks. Those tweaks might well make it easier as they would prescribe some or all elements of the calculation and it set in a particular way would also lean towards leaseholders by making the premium cheaper.

In addition, the more parts that are prescribed the less work that there is for valuers to do. Bad news for valuers, but better news for public certainty. It would be easier for people to know ‘up front’ what their lease extension or freehold is going to cost.

Other options

The paper is not short (242 pages to be precise), and so it does also outline some other ideas, which the Law Commission call ‘sub-options’ – these essentially blend in some other ideas with the 3 main suggestions. The best of which, in my view, is the development and use of a prescribed calculator for lower value or straightforward claims.

In summary

This paper gives government lots of good options to consider when drawing the political lines on what really does amount to the redistribution of both wealth and power in the leasehold sector.

It won’t be radical enough for some people, but then that is entirely to be expected. The Law Commission are at pains to point out that any change that is too radical would be open to challenge under the Human Rights legislation, a point which those who want to see real and lasting change for leaseholders would do well to bear in mind.

Mark Chick

9th January 2020

With only a short while to go until Publication, it will be very interesting to see what the Law Commission’s report on the options for reforming the law in relation to valuations will look like.

Some of us did make some predictions see my comments on the Bishop & Sewell website see the link:

Predictions for Reform

Law Commission’s Report on Reform of the Enfranchisement Process

We do need to bear in that these will be options for reform – in other words a range of different paths that the government could go down to change the law. As the actual choice of how to implement any reform is a political one, the Law Commission are only going to be laying out ‘options’ that the government can choose from.

Having said that, government has throughout this process made it clear that it is committed to making it ‘cheaper and easier’ for leaseholders to extend their lease or buy their freehold.

Let’s see what the announcement will bring!

‘It’s all up in the air’ – What is the impact of the Upper Tribunal’s recent decision in Queen Court?

 Queen Court in WC1

The Upper Tribunal has handed tenants an important victory concerning ‘common parts’ including roof spaces and airspace leases in leasehold enfranchisement

The Upper Tribunal (Lands Chamber) has held that a lease of the airspace above and the subsoil below a leasehold block of flats must be classed as “common parts” of the building when deciding if they were to be acquired in a decision that could potentially have a profound impact on the property sector. 

For the full reference see LM Homes (and others) v Queen Court Freehold Company Limited [2018] UKUT 0367 (LRA/16/2018) and at:

http://landschamber.decisions.tribunals.gov.uk//Aspx/view.aspx?id=1470

In urban areas space is always at a premium and property owners are always looking for room to expand into. Often, “the only way is up.”

In a block of flats the freeholder may want to create or reserve value for the future and one way of doing this is with the grant of a lease of the airspace above the property.

Why is the decision in Queen Court so Important?

In the case of Queen Court the freeholder had sold off leases of the airspace above the property and also separate leases of the subsoil, and a part of the boiler room.

Investors had paid fairly significant sums for these in the hope of future development. The fact that the leases can be acquired as part of an enfranchisement will make it more difficult to implement similar schemes successfully in the future. 

As matters stand at the moment, this is bad news for landlords and good news for tenants.

How do you create an airspace lease?

When looking at airspace two points have to be borne in mind: firstly, comes the creation of the lease itself. This will normally trigger the provisions of the Landlord and Tenant Act 1987 and mean that it has to be offered first to the flat owners under the “right of first refusal” under that Act. Only if they do not accept this offer to sell to them can the transaction proceed.

Secondly, if a lease of the airspace (or any other area) outside the flats has been created, and a claim to the freehold is made by the flat owners under the Leasehold Reform Housing and Urban Development Act 1993, then the question will arise as to whether (as a matter of law), the flat owners are able to buy the leases of these spaces.

This was the point that was central to the case of Queen Court.

The test that determines whether the lease of an area outside the flats can be purchased depends on Section 2(3) (b) of the 1993 Act. This says that a lease of common parts can be acquired if the purchase of that area is reasonably necessary for “the proper management or maintenance of those common parts.”

It was this test, its meaning and how you might be able to ‘work around’ it to retain a leasehold area that is the most important part of the Queen Court decision.

Is the airspace above a block of flats a common part?

It has been settled law for some time that the airspace above the property is a ‘common part’ and there are a variety of cases under the 1987 Act confirming this (notably Dartmouth Court Blackheath Limited v Berisworth Limited [2008] EWHC 350 (Ch)). Any sale of the airspace above a block will therefore have to be notified to the tenants under the ‘right of first refusal’ under the Landlord and Tenant Act 1987 unless it falls under one of the exceptions to this rule. 

Under the 1993 Act, (where the tenants are looking to buy the freehold and other areas on a compulsory basis), there are also cases that confirm that the airspace can be a common part when discussing whether a lease of it can be acquired.

In Queen Court, the Upper Tribunal looked at a number of points of detail about the distinction between areas that the flat owners do not have access to, but that could still potentially be ‘common parts.’

This was contrasted with the scenario where the area in question had ceased to be within the flat owners’ use and had then been made subject to a lease. In that sort of case, (provided that the area was not needed for proper management or maintenance), it would not be acquired.

So, whilst it cannot be said categorically that all leases of areas outside the flats themselves will be able to be acquired, if the lease is found to be a lease of what are deemed to be ‘common parts’ then the simple act of the landlord creating a lease of this area will not be enough to stop it being a common part.

As the tribunal said at paragraph 77of its decision in answer to the landlords’ suggestion that the grant of a lease of the airspace would stop it being a common part:

“If it were the case that a lease of the common parts, by itself, was sufficient to cause an area which continued to provide some shared benefit to the building no longer to be a common part, the provisions of the 1993 Act entitling tenants to acquire the common parts would be largely redundant.”

In Queen Court, the creation of the airspace lease itself was valid, but the key question was whether the lease itself, which allowed access over the existing airspace would offend these provisions if it was not acquired and simply left in place. 

This would leave the owner of the airspace lease free to carry out further development.

The airspace lease in Queen Court reserved rights in favour of the landlord (which would of course be the flat owners if the freehold changed hands) – allowing ‘for the proper management or maintenance of’ the common parts comprised in the airspace.

This is the exact test for acquisition under the enfranchisement legislation and so the central question was whether a lease of a common part reserving rights in this way would provide enough ‘access for proper maintenance and management’ and in doing so would mean that because these rights were provided that the lease did not need to be acquired.

The position on this has been unclear until now.

The decision

At first instance, the lower tribunal (the First-tier Tribunal) had held that the tenants could acquire the airspace lease (and the other leases) and so the landlords then appealed to the Upper Tribunal.

The Upper Tribunal held that even though the lease in question had the relevant wording in it suggesting that the test under Section 2 of the 1993 Act would be met – in other words, even if the flat owners would have had access for ‘proper management or maintenance’ the fact that the nature of the airspace would change fundamentally after any development took place as it would cease to be a common part meant that the landlord’s drafting was not sufficient to avoid the lease being caught.

The Upper Tribunal decided that because the rights granted were over the current roof space and air space above it that development of these areas would destroy the particular areas in question. Martin Rodger QC held at paragraph 85 of the decision:

“….the appellant intends, if planning permission can be obtained, to undertake work which will cause the airspace no longer to be accessible. Convenient access to the structure would become impossible because of the presence of an additional flat or flats on top of it, and any change in the structure would be unnoticed and difficult to monitor. In my judgement the risk of these consequences makes it reasonably necessary for the proper management of the airspace that the airspace lease be acquired. If the lease is not acquired the airspace will be incapable of being managed as it currently is. It does not matter that the respondent will presumably still have access to a new roof over the Building, or that it will have access to the existing structure in the exercise of the rights reserved in the airspace lease, since the former will relate to a different structure and the latter will involve a very much more complex operation than is currently possible.”

What the decision seems to be saying therefore is that the management of the airspace itself would not be possible unless it were acquired.

What does this mean in practice?

Well, the first thing to take away from Queen Court is that the decision itself is subject to an appeal. Currently (March 2019), the landlords are seeking leave to appeal the Upper Tribunal’s decision from the Court of Appeal. That means that the position may not be certain for a while yet.

However, if the law remains as it is then this may have big ramifications for developers and freeholders looking to realise additional value by the use of such leases.

Mark Chick

10.4.2019

Some may also say that the report itself is well voiced on the part of those campaigning for change, but that the range of views could perhaps have been wider. There is a view expressed by some that a long lease with a modest ground rent is acceptable and certainly not unsaleable – provided that appropriate advice is obtained. That view does not come over in the report.

However, the report does show that government wants to look seriously and much more widely at the whole of leasehold, which is very welcome.

Mark Chick