A change to the threshold for non-residential premises in enfranchisement and the prospect of mandatory leasebacks – Both in consultation as of 11th January 2022.

Following on from the Law Commission’s work on this and hot on the heels of last January’s announcement that MHCLG (now DLUHC) was looking to consult on the proposed reforms to make it ‘cheaper and easier’ to enfranchise we now have a new consultation – closing 22nd February 2022.

The consultation seeks views on the following proposals:

• The non-residential limit for collective enfranchisement;

• The non-residential limit for right to manage claims;

• A non-residential limit for individual freehold acquisitions;

• The introduction of mandatory leasebacks as part of collective freehold acquisitions;

• Commonhold voting rights in shared ownership properties; and

• The provision of information during the sale of a commonhold property.

So what do we think about all of these ?

There is quite a lot here, so I am going to focus first on the enfranchisement options, as after all this is very much ‘Leasehold Reform News.’ The big item is really the 25% rule as it might affect collectives.

The 25% threshold was discussed in the Law Commission’s work at some length – and for those whose buildings don’t qualify at the moment because more than 25% is used for ‘non-residential’ purposes this would be very good news – but, I am sure that there are plenty of buildings out there that have been specifically built with this limit in mind.

Developers, investors and pension funds may be less keen on losing the ‘jewel in the crown’ of their retail investment portfolio to an enfranchisement sub-committee – or indeed a rival investor who uses the legislation as a stalking horse to make this happen.

Don’t forget also that if you buy the freehold and there are no long leases in place of the retail units you would have to fund the purchase of these somehow. If you live in a flat over a ‘Bluewater’ like development this might cause something of a funding gap.

Unless, of course, the freeholder takes a ‘leaseback’ of these areas – meaning that you don’t have to fund these areas as the freeholder retains them on a long lease and you become their landlord. Well, at the moment that will only happen if the freeholder wants it to and many will say ‘no’ as they know that it will make the enfranchisement fail.

Mandatory leasebacks – and how this would fit with changing the 25% rule

But wait, what’s this? The consultation is proposing mandatory leasebacks – something of a ‘life hack’ for collectives ! If the freeholder had to take a leaseback then this will certainly make it ‘cheaper and easier’ as the cost (and value) in these areas stays with the freeholder.

Well, of course, if this did happen many many more blocks would be able to enfranchise and the debate would shift to the management issues that might arise in the after scenario.

So, what does all this this mean?

Well, if the law is reformed in this way, there will be a lot more enfranchisements in situations where this has not been possible before. Some of these will be quite complex mixed-use developments. If the requirement for mandatory leasebacks were introduced at the same time, then this would very much clear the pathway for a lot more collectively owned buildings, and, dare I say it, enfranchisement professionals will be kept very busy indeed.

A slightly belated, Happy New Year!

Mark Chick

12.1.2022

MHCLG Announcement: Government reforms make it easier and cheaper for leaseholders to buy their homes:

https://www.gov.uk/government/news/government-reforms-make-it-easier-and-cheaper-for-leaseholders-to-buy-their-homes

7th January 2021

Big news in leasehold reform – this is Leasehold Reform News if ever there was…

Right in the middle of Brexit, with news of what might be termed a ‘democratic deficit’ (no pun intended), in America we have this announcement from MHCLG that Robert Jenrick as Housing Secretary plans to get government to act on the proposed reforms to residential leasehold.

For those who have been following this story this is the culmination of the journey that started with the commentary in the White Paper ‘Fixing our Broken Housing Market’ and then led to the paper ‘Tackling Unfair Practices in the Leasehold Market.’ After this we had the Law Commission’s extensive work on the proposed reforms in this areas which led to the publication of their output paper ‘Leasehold home ownership: buying your freehold or extending your lease’ published on 20th July of last year.

Government now plans to act and this announcement makes plain their desire to adopt a number of the Law Commission’s recommendations, although what is also clear is that they plan to do this in two stage, the first most likely to be to take steps to ban ground rents and the second to pave the way for more comprehensive leasehold reform.

The exact details will become clearer in due course, but the headline news items that we can take away from today’s announcement are as follows:

• no more marriage value

• 990-year lease extensions at nil rent

• An industry wide commission on Commonhold – a ‘Commonhold Council’ charged with preparing the way to make this work

These are all massive changes and shows the government’s resolve to pick up on a number of the key recommendations in the Law Commission’s report.

Some initial comments on these appear below:

No more marriage value

This is massive and will not be popular with freeholders to say the least. It certainly will make it ‘cheaper’ to extend a lease or buy the freehold.  There is also an indication that a calculator will be made available to determine claims, whether the ‘calculator’ is to apply to all claims, or just simpler or lower value claims remains to be seen.

However, the proposal to remove marriage value (which often comprises up to 1/3 or more of the premium in many mid-lease length cases) is big news. There is almost certain to be a challenge from the larger freeholders under Human Rights legislation or similar. If we consider the position of say a high value flat on one of the Central London ‘Great Estates’ this is going to be significant.

990-year lease extensions at a nil rent

This is not a surprise – the plus 90-year lease extension has just been upgraded, by another 900 years and so won’t need doing again.

The nil rent element is no surprise either as this was (and is) the case for statutory extensions as things stand. The ‘surprise’ is in relation to leasehold houses – the new lease will be at a nil rent rather than the ‘modern ground rent’ under the plus 50 year extension that exists (and is never used) at the moment. You might ask what the point of this is – but it does give a leasehold house owner the right to make the lease much longer and buy out any existing ground rent in one go – although the current note is silent on buying the freehold – presumably MHCLG will propose to adopt in due course the Law Commission’s recommendations on making ‘units’ enfranchiseable so that both flats and houses are subject to the same regime.

The relevance to houses is a particular response to the so called ‘Leasehold Scandal’ of leasehold houses being sold by developers with onerous rent terms which in part have sparked the governments interest into reforming the law in this area.

Nil rent

It also appears that a cap will be set on the sort of ground rent that can be charged if lease is renewed outside of the statutory process. The detail is currently unclear, but possibly this may follow the Law Commission’s recommendations that any new rent could be imposed only during the existing lease term and might be subject to an overall cap. There is certainly an indication of a cap on the ground rent payable. 

Commonhold

We’ve been here before – when the Commonhold and Leasehold Reform Act 2002 came into force, in 2003, but this time there does appear to be a willingness to recognise that unless it can be made fit for purpose and also the “industry standard” (and possibly also compulsory?) there will be no take up.

An industry-wide cross sector committee would be very welcome to iron out the issues and to set the frame for other reforms that may be needed to make it work. Unfortunately, the current version of Commonhold is not sophisticated enough – and proper refinement for implementation may require other areas of law to be dealt with as part of this process.

So, what next?

As ever with a packed parliamentary agenda including both Brexit and Covid-19 we will have to wait and see. However, this announcement does make plain that legislation will be brought forward in ‘in the up and coming session of parliament’ to set ground rents to zero. The announcement states that this is part of a two-stage process of reforming the law with a response to the remaining Law Commission recommendations ‘in due course.’ That appears to indicate a longer time frame for the wider reforms.

Mark Chick

7th January 2021

We start our afternoon session with Mark Chick @section42, Katherine Simpson @EdwinCoe and Richard of @BeckettandKay This Hague House Clinic and Q&A session designed to give all delegates the lowdown from this week’s morning sessions. Questions and debate welcome! #ALEPConf pic.twitter.com/HOmz075jqU

— ALEP (@ALEPofficial) October 15, 2020

Just following up on a question raised during the Q and A session at the ALEP conference 2020 on 15th October 2020

The question concerned the rights of shared ownership tenants to extend their leases.

The position is unclear as the relevant case law shows. Whilst the Brick Farm case (see notes below) held that shared ownership leases were qualifying tenancies for the purposes of the 1993 Act as regards collective enfranchisement, so far as I am aware there is no reported case where a shared ownership lease has been the subject of a statutory lease extension under the 1993 Act.

I known that various housing association providers will do lease extensions on a voluntary basis and there is commentary on this in the Law Commission’s Consultation Paper (see paragraphs 9.24 onwards). However I am of course putting this out there so that if anyone knows different they can shout about it.

As we said in the session, if the position was completely clear cut then the Law Commission would not have mentioned both in the Consultation Paper and in their July report that the position needed to be clarified. They also recommend in both documents that future legislation addresses this issue- so that owners of shared ownership leases who have not staircased up to 100% should be able to extend under statute.

That is course leaves the slightly vexed question of how such lease extensions are to be valued. I was very glad that we had Richard Kay in our session so that I was able to pass this hypothetical question over to him.

That is one other thing that any proposed reforms will have to address when looking at the options to reform the valuation mechanism(s) for statutory cases.

Mark Chick

15th October 2020

I have set out the summary from the Consultation Paper below as it contains an excellent discussion of the relevant case law and sets out the Law Commission’s views.

So, is this going to be the biggest change in enfranchisement in the last 17 years ?

The law Commission have today published their long awaited report into the legal aspects of the proposed reforms for the law in this area.

The Commonhold Leasehold Reform Act 2002 was the last big legislative foray into reform in this area, which came into force in 2003.

Bearing in mind the non-neutral terms of reference that the Law Commission were given the proposals seek to redress the balance between landlords and tenants and show a big change of emphasis towards the tenant’s side of the equation.

https://www.lawcom.gov.uk/project/leasehold-enfranchisement/

There are also two other reports on the Right to Manage and Commonhold. I set out below the key enfranchisement changes from the Law Commission’s own summary document as they propose them in their own words. The main report runs to 859 pages ! So there is plenty more to read and digest in the days and weeks ahead.

“Enfranchisement rights — our key recommendations

• We recommend that leasehold owners of houses and flats should no longer have different enfranchisement rights, reducing the complexity of the current system. Wherever possible, our recommendations apply uniformly, irrespective of whether a property is a house or a flat.

• We recommend that leaseholders of both houses and flats should have a new right to a lease extension for a term of 990 years, in place of shorter extensions of 90 or 50 years under the current law. There would be no ongoing ground rent under the extended lease, and landlords could not use the lease extension process to impose new, onerous obligations. Our recommendations place the vast majority of the home’s value in the hands of the leaseholder, preventing the need for further extensions and providing increased security for the leaseholder.

• We recommend a new right for leaseholders with very long leases to “buy out” the ground rent under their lease without also having to extend the length of their lease. This will enable those leaseholders to free themselves from the ongoing obligation to pay ground rent.

• We recommend that the scope of enfranchisement is expanded so that more leaseholders can buy the freehold or extend their lease. We recommend that leaseholders should be able to enfranchise immediately after acquiring their lease rather than having to wait two years, as they do now. And flat owners should together be able to buy the freehold of premises where up to 50% of the building is commercial space rather than the current limit of 25%.

• We make several recommendations to make it easier for leaseholders of flats to enfranchise. For example, we recommend that groups of flat owners should be able to acquire multiple buildings (such as an estate) in one claim, rather than incurring the unnecessary expense of acquiring each building individually. We recommend that leaseholders should be able to require landlords to take “leasebacks” of units within the building which are not let to leaseholders participating in the claim, which will significantly reduce the price that leaseholders must pay.

• We make recommendations to protect leaseholders from the imposition of onerous or unreasonable obligations when they buy the freehold of their house or flat. In particular, our recommendations protect leaseholders from obligations which are designed to generate a profit or provide an ongoing income stream for landlords.

• We recommend replacing the various procedures for making enfranchisement claims with a single, efficient procedure. This procedure removes the legal traps which cause claims to fail and which enable unfair procedural or tactical advantages for landlords with experience of the system.

• We recommend that the current requirement for leaseholders to pay their landlord’s costs of dealing with an enfranchisement claim should be eliminated or controlled. Leaseholders must currently pay their landlord’s uncapped costs, which can exceed the price that leaseholders have to pay to their landlords in an enfranchisement claim. The approach we recommend depends on Government’s response to the options we have presented about how to calculate the price but, either way, leaseholders will know up front what the costs of a claim will be.

• We recommend that, where possible, the Tribunal should determine enfranchisement disputes and issues, replacing the current division between the Tribunal and the county court. Alongside the role of the Tribunal, we recognise the importance of alternative dispute resolution. Our recommendations will save leaseholders and landlords time and money.

• Landlords and leaseholders can enter into voluntary agreements (for example, freehold transfers) that are not consistent with our recommended statutory scheme. Those agreements fall outside our Terms of Reference, but we recommend that Government consider taking steps to regulate these transactions to prevent leaseholders from being persuaded to agree to lease extensions or transfers that have been drafted on unreasonable terms.”

Comment

What does all this mean? Well, it shows the direction of travel and of course this report would have to be turned into law by a future parliament. That itself could take some time and might indeed not happen, or the changes might be quite different once parliament has had their hands on them.

However, this all has to be seen in the context of a set of wider proposed changes – banning the creation of new leasehold houses, and separate government proposals to ban ground rent for new leases. There is an agenda of change and there will be a lot of work to do on the detail of this, but this report does set the agenda for a big sea change in this area.

However, it is likely to be a good 3-5 years before any of these recommendations might become law, as this depends on parliamentary time and inclination.

A lot to digest, but interesting times ahead in leasehold – watch this space!

Mark Chick

21st July 2020