Enfranchisement - Guest Lecturer Doug Crichton PDF

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MSc Real Estate UK Law Lecture delivered by Doug Crichton....

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Guest Lecturer – Doug Crichton, Residential Advisor at Grosvenor Estates -

The UK government are expecting to drastically change the current leasehold laws with main aims of reducing costs, giving tenants more rights and removing complexity – this will be the largest change in history.

Grosvenor Estate - 340 year history in property, family owned. - One of the largest privately owned international property groups with 16 offices worldwide. - Purpose  to create lasting commercial and social benefit. - Have set ambitious sustainability goals to achieve by 2030. - Investments need to meet sustainability goals going forward. - Global Portfolio  24% office, 29% residential, 5% other, 42% retail. - Strategy: a) Earning a reputation for quality, integrity, social leadership and responsibility. b) Developing and coordinating an internationally diversified property group. c) Delivering attractive long-term returns. - In the short-term, recovering from Covid-19 is the main focus and helping tenants through this etc. What is enfranchisement? - Doesn’t have the best of reputations – it is highly complex in both valuations and law. - The government is hoping to remove a lot of complexity around enfranchisement as a major reform. The Enfranchisement Rights (current law) - Residential tenant with lease 21+ years (when granted/original lease). - House  ability to buy freehold from landlord. - Flat  ability to get a 90 year lease extension on top of unexpired term. - Block of Flats  ability for owners to collectively buy the freehold (commercial area cannot exceed 25%). Enfranchisement at Grosvenor - Around 100 live claims currently. - Average £50-60m per annum. - 1,700 freeholds lost since 1967. - 1,800 units still to be enfranchised. - Policy – pro-active (assuming it is clear leaseholder qualifies). - Volume – decreasing by 10% per annum. - Grosvenor look to reinvest the enfranchisement money into the development pipeline.

The Law – 2 statutory Acts

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1967 Leasehold Reform Act – governs the freehold acquisition of houses. 1993 Leasehold Reform, Housing and Urban Development Act – governs the flats and collecting buying. Amendments – 2002 Act about scope who can enfranchise.

Why do we have enfranchisement? - Debated in latter 19th Century. - 1967 Act – Victorian leases coming to an end. - Initial main benefactors – South Wales – miners needed increased security of tenure as houses came with their jobs. - Limited application – low rent/rates test.

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European Court 1979 Grosvenor took UK to European Court – 1967 Act breached ‘human rights’ as it was decreasing their portfolio. 1984 – case heard before European Court in 1984 and judgement in 1986. Grosvenor lost and Duke (head of the family) resigned from Conservative Party.

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Enfranchisement History 1980’s Increasing social and political pressure on leasehold system and unruly landlords. 1994 Act introduced – introduced lease extensions etc.

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2002 Act Abolished residency test (corporates no qualify). Marriage value – MV where lease is greater than 80+ years. 2008 – abolished low rent test – increasing scope of people qualifying.

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How to qualify to buy the freehold? - Residential lease of 21+ years (originally granted) - Owned lease for 2 years. - Premises must qualify. Enfranchisement: Houses - Right to buy the freehold – LRA 1967. - Right to a 50 year lease extension – LRA 1967 – rarely exercised as a large ground rent comes into play. Houses - Must qualify as a ‘house’ – Section 2.1 of the Act: a) Property must be designed and adapted for living in… and reasonably so called. b) A house as a place to live, rather than as an architectural feature, not intended to confer statutory rights on tenants of entirely commercial building (Hosebay). - Property must be structurally divisible (no under or over-hangs) - Law remains unclear.

What is a house?

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‘once a house’ always a house? Despite commercial use? Retail premises on ground floor and flat above. Flat was fully connected with shop and owner of shop lived in flat. 3 to 2 against in House of Lords – Tandon v Sturgeon Homes ‘originally designed as a house’ Adaption away from original design not sufficient. Decided it was a house.

Lease Extension - Qualifying Tenants: a) Tenant of a residential flat lease of more than 21 years. b) No long a residence test or low rent test. c) 2 years’ ownership -

Term – term will be the unexpired term plus 90 years. Lease terms – same terms as existing lease, limited scope to revise. Rent – peppercorn rent. Premium – comprised of three elements: a) The amount by which the landlords interest in the flat is reduced as a result of the lease extension. b) Marriage value (longer the unexpired residue, the lower the marriage value) c) Compensation for severance.

Collective Enfranchisement - Building – commercial parts must be less than 25% of whole (proposal for this to be moved to 50%). - Qualifying tenants – must exceed 2/3rds. - Claim – all claimants must be QT’s (i.e. leases 21+ years). How do you avoid enfranchisement? - Contracted-out leases (likely to be abolished) – gives landlords ability to sell tenant very long lease but will preclude them from bringing a claim for a freehold in the future. - Leases of less than 21 years (grant 20 year leases; 9-year leases or AST’s). - Commercial area greater than 25%. The end of the road for enfranchisement? The debate… - Reforms to the leasehold system are now inevitable (when rather than if). - Set to be the biggest changes to property law in a generation. - Government review of ‘unfair practices in leasehold market’ in 2017 (e.g. doubling ground rent scandal). - December 2017 – government announces it intends to bring forward legislation to prevent houses being sold on leasehold basis. - Government wasn’t to make enfranchisement cheaper and simpler. - 7th January 2021 – Secretary of State wants to abolish marriage value. Government Leasehold Reform Consultations

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There are 3 areas of leasehold reform that have been recommended by the Law Commission: a) Enfranchisement – quicker, cheaper and simpler. b) Right to Manage – expanding and simplifying leaseholders ability to manage a wider variety of buildings including mixed-use. c) Commonhold – to make it easier for existing leaseholder to convert to Commonhold and to make it the standard structure for new-build and mixed-use developments.

Concerns for Grosvenor: - Removal of marriage value from enfranchisement valuations  reduced premium by 30%. - Proposal: 50% of building can be in commercial use to enfranchise (from 25%)  RISK: loss of freeholds for mixed-use buildings. Means buildings and spaces inbetween them are less controlled and invested in. What is Marriage Value? - MV is created when the whole is greater than the sum of its parts. - Think about a pair of matching vases – on their own, the vases may be worth £1000 each. If they are sold together as a matching pair they might be worth £2500. That additional £500 is the MV. - Key part of valuation – helps determine Market Value of property interests being acquired. The Future? - Change to leaseholds is inevitable. - Commonhold is preferred form of tenure but not without limitations. - Ground rents on new leases to be removed as part of first set of legislation. - 2nd stage of legislation (expected from 2024) will deal with enfranchisement qualification and valuations, right to manage and Commonhold....