The Law Commission has published its long awaited report on ‘Leasehold home ownership: buying your freehold or extending your lease - Report on options to reduce the price payable’. The report follows the Commission’s consultation on wide-ranging reforms to the enfranchisement regime (enfranchisement being the extension of an existing lease or purchase of the freehold interest in the property).
The Commission is shortly due to publish three further reports on the following areas:
The mandate of the report was for the Commission to report to the Government on “options to reduce the premium payable by existing and future leaseholders to enfranchise whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests”.
The Proposed Schemes
The report has proposed 3 schemes of valuation:
Scheme 1 - It would be assumed that the leaseholder isn’t the purchaser of the asset. The premium here would be based on a premium payable for the ground rent income for the remaining term (‘the Term’) plus the value of the right to have the property back (‘the Reversion’).
Scheme 2 – It would be assumed that the leaseholder isn’t the purchaser of the asset but may do so in the future. The premium here would be the Term plus the Reversion plus Hope Value (i.e. half of the Marriage Value)
(Marriage Value is an additional payment to reflect that the value of owning the freehold interest outright is worth more than the sum of the freehold and leasehold interests in separate ownership. Hope Value is the potential selling of the asset to the leaseholder in the future if it is sold to another party first)
Scheme 3 – Would be a continuation of the current law. It would be assumed that the current lessee is the purchase of the asset. The premium here would be the Term plus Reversion plus Marriage Value
Schemes 1 and 2 would reduce the premiums currently paid. Scheme 1 would get rid of both Marriage Value and Hope Value. Scheme 2 would get rid of Marriage Value and (in certain cases) Hope Value.
Further Proposed Amendments
As well as the proposed amended Schemes 1 and 2 the report also suggests the following additional amendments that would look to reduce the premium payable if any of the three proposed schemes were adopted going forward:
This would be the most controversial amendment. At present such rates are very much a subjective debate between valuers for landlords and tenants. Government would need to determine them and would need to decide what the applicable market rate was.
The report suggests capping the level of ground rent that is taken in to account when calculating the value of the Term. The justification for this amendment is purportedly ‘onerous ground rents’ and the impact they have on the Term valuation.
Leaseholders could be given the option to decide to accept a restriction on future development of a block in return for the non-payment of Development Value.
The valuation system could working differently depending on whether the leaseholder was an owner occupier or a buy-to-let investor.
This would only apply if other proposed reforms were implemented which would have the overall effect of reducing premiums.
Any increase in value of the property which is as a result of an improvement carried out by the leaseholder would be deducted from the freehold value.
The right to hold over can reduce the value of the freehold and is therefore currently used to reduce the premium paid. This could be removed in limited circumstances if other proposed reforms were implemented which would have the overall effect of reducing premiums.
The Commission has, as per their instructions, proposed reforms to the current enfranchisement process so as to “reduce the premium payable by existing and leaseholders to enfranchise”.
However, as they themselves state, they do not make recommendations as to what a fair premium is. It is for the Government and Parliament to ultimately decide this. These recommendations are therefore essentially superfluous to that greater question. The current system may even be deemed to work perfectly well if the current methodology for calculating the applicable rates (Term, Reversion, Marriage Value and Hope Value) is reformed to produce what the Government eventually decides is a fair premium.
Amendments to rates and the premium calculated must, as the Commission’s own instructions state, ensure “sufficient compensation is paid to landlords to reflect their legitimate property interests”. The Commission’s own report reflects on this citing the need to comply with Article 1 of the First Protocol of the European Convention on Human Rights as enacted through the Human Rights Act 1998 as well as being conscious of the risk for potentially reducing income for pension funds and charities to which we are all dependant in one way or another. The phrasing of this part of the instruction is at odds with the first part of the instruction to “reduce the premium”. Surely you need to determine what “sufficient compensation” (i.e. a fair premium) is first and then determine the appropriate pathway to ensure that such a level of compensation is paid. The Commission are giving options to the Government to try and reach a target that has yet to be determined. This is putting the cart before the horse.
If the Government is serious about enfranchisement reform then they should stop dallying around the issue and address the pertinent question of the level of premiums payable and whether or not they consider them to be fair. They need to decide once and for all whether the premiums payable are fair and if not reform the system to determine a fair premium and in doing so to strike a fair balance between leaseholders’ and freeholders’ interests. Any other reports such as this are just window dressing and do not address the central issue.
On the evening of Friday 15th November, news reports nationally focused on an intense fire at The Cube, a 6-floor block of student accommodation in the centre of Bolton. Although the cause of the fire has not yet been officially confirmed, similarities to Grenfell Tower ensure that this event keeps the subject of block fire safety at the forefront of the property sector’s minds.
J B Leitch’s Legal Director Phil Parkinson, our specialist in niche regulatory fire safety issues, comments on the legal aspects related to properties such as The Cube, and advises landlords and property managers on steps to take to protect both investments and flat occupiers.
What action has been taken since Grenfell to improve safety in tall buildings?
An extensive national project is underway to survey high-rise buildings over 18m in height and the building stock of large institutional and social landlords, much of which has now been completed. Assessment of cladding and fire safety procedures is of particular focus.
A fund of around £200m has been made available to remove and replace unsafe cladding from around 170 privately-owned high-rise buildings.
The Cube was 17.84m in height, and will not therefore have fallen under the scope of the national survey. To take a proactive approach to fire safety across portfolio investments, landlords and managers are now looking to commission their own voluntary assessments of buildings not falling within the national scope, and it will be reassuring to many occupiers and leaseholders that surveys are being undertaken.
What happens following an incident such as this?
Immediately following an incident, landlords or managing agents will generally need to ensure an on-site presence quickly. Surveyors and insurers will access the site to assess damage, and will work with fire authorities to ascertain the causes of the fire and the structural impact of the fire on the building.
Legally, and when assessing costs for repair works or preventative measures, what happens next will depend on those responsible for the property and how ownership of the building and the flats within it is structured. Often, flats are let on long leases to occupier or investor leaseholders, allowing a landlord to recover costs through service charges, but occasionally landlords may assume responsibility for the whole building themselves, presenting faster rental yield returns but greater risk in terms of assuming costs for ensuring fire safety in the event that a building is deemed to require repair work, replacement work or additional safety measures.
What can be done to protect landlords and occupiers?
From a practical perspective, it is essential to ensure that the right insurance is in place. Undertake thorough due diligence on policies and the coverage you can expect to receive, invest in a comprehensive policy, and take a ‘safety first’ approach by instructing surveys on buildings under 18m where cladding has been applied to the exterior of the structure.
Ultimately however, assessment of safety isn’t an operationally legal issue but rather an undertaking required to be carried out with reference to a legal framework. Surveyors and engineers must determine the safety credentials of a building and whether the building is compliant with safety regulations. Legally, a building must be compliant with regulations and we will call upon safety experts for determination as to whether a building is defective.
Lease structure and advice available to landlords
How a lease is structured may well determine who is responsible for fire safety works and how those works are to be paid for. The lease terms will set a starting position; obligations under statute often do not reflect what can be recovered under the lease, but interpretation of the lease terms will be considered initially.
Advice on title structure and relevant leases is of great value to landlords, in particular where costs may be recoverable or otherwise in advising where a landlord is potentially exposed. By closely reviewing liability at an early stage, landlords may be much more thoroughly protected.
Where Prohibition Orders or Enforcement Notices are served, our team has successfully advised on and, when necessary, challenged these on behalf of landlords which will allow parties more breathing space to gain expert advice, reports and surveys as necessary.
As a block management specialist, J B Leitch is expertly positioned to advise landlords, investors and property managers in the regulatory advice of fire safety issues, both at the commencement of a development in lease structure planning and in providing proactive, niche understanding relating to existing building stock.
Knowledgeable advisory services by our team will present a clear overview on risk and challenge opportunities, protecting both investments and those living within high-rise buildings.