A potential conundrum indeed

Having negotiated the premium for a lease extension including my client’s head lease to give the claiming lessee an overall extended lease of approx. 987.5 years instead of an additional 90 years to approx. 141 years, the claiming lessees decided to withdraw pending the outcome of the Leasehold and Freehold Reform Bill currently wending its way through parliament.

Assuming the Bill indeed becomes law and the lessees claim a proposed extended lease of 990 additional years, the future extended lease will overall be 20.25 years longer than the voluntary deal offered.

This raises a potential conundrum.

As stated in my February blog, all intermediate leases are to be merged with the freeholder’s superior interest. The claiming tenants will also not be required to apportion the premium between the respective superior interests nor be required to negotiate the separate premiums payable between the respective landlords.

In due course, the lessees will serve notice on the freeholder as the competent landlord who will effectively be uninterested as:

  • it enjoys no ground rental income,
  • the value of its 20.25-year superior interest in 987.5 year’s time (based on today’s valuation date) will be effectively nil, and –
  • will not recover (as proposed) its costs

yet

  • has a duty of care to the intermediate landlord.

So who will negotiate the premium – the freeholder or the intermediate landlord?

From the intermediate landlord’s point of view, why would he want to run up unrecoverable costs other than be in the ‘driving seat’ to ensure he can extract the best premium possible for the loss of his interest.

Only time will tell once we know exactly what the Bill will look like once it completes all its parliamentary stages in respect of how the above scenario is to fairly resolved.

 

Another thought about the proposed Leasehold and Freehold Reform Bill

Right now we have no idea what the proscribed capitalisation and deferment rates will be.

Without knowing this, it is impossible to advise as to the likely cost to extend a lease / acquire the freehold under the proposed regime in place of the proposed abolition of marriage value.

As a result the standard valuation method that will be used in all but limited cases (eg: leases of less than 5 years) will not be operable until the rates have been proscribed.

Don’t be surprised therefore if the LFRB is enacted first but effectively rendered inoperable until the rates have been proscribed by the Secretary of State after due consideration has been given as to how exactly these are to be calculated every ten years.

 

Another consequence of the proposed Leasehold Reform and Freehold Bill

Perhaps the biggest headline proposal to make it easier and simpler to extend a lease / acquire the freehold is that all intermediate leases are to be merged with the superior interest.

It will no longer be up to the claimant to apportion the premium in the offer notice between the relevant landlords; nor on acceptance of the notice, to negotiate the separate premiums payable between the individual landlords.

In normal circumstances, the apportionment may reduce the overall premium by a few percent. However in the case of any claim on the Grosvenor Estate in Belgravia, where the majority of the estate is held by Grosvenor Estate Belgravia [GEB] with a head lease expiring in March 2184, there will be a potential unintended consequence.

There is an accepted minimum discount of 30% to reflect the onerous nature of the escalator clause in GEB’s intermediate lease as determined by the Upper Tribunal in Klaasmeyer  [2010] UKUT 69 (LC).

This discount will technically no longer apply as the apportionment will be left entirely between GEB and the Trustees of the 2nd Duke of Westminster Will Trust (that owns the freehold) to fight out between themselves.

It will remain to be seen whether valuers for a claiming tenant will still argue the discount should flow back to the claimant lessee.

 

Leasehold and Freehold Reform Bill – really helpful rule applying to houses in potentially reducing the premium will be removed.

Aside from the main changes already reported on the proposed legislation in this blog, one subtle change will be the removal of s3(3) of the Leasehold Reform Act 1967 applying to houses..

This allows a tenant to go back to the beginning of prior leases (assuming each prior lease was a long lease originally of over 21 years and the name of the tenant at the end of the prior lease is identically the same as that as the subsequent lease) as if it was a single tenancy. This  effectively values the house as to its condition, layout and size as at the grant of an earlier lease as at the valuation date.

By making this change, the rule for houses will be the same is it is for flats where one can look no further back than the beginning of the current lease when assessing the value of a tenant (and his/her predecessor in title’s) lasting improvements.

Although this involved considerable detective work in searching through past archives of former leases, drainage plans and licences to alter – the saving could be tremendous.

I well recall settling a freehold claim for a house in Belgrave Sq at approximately 2/3’s its gross internal area as at the valuation date as I managed to prove that a prior lessee of an earlier lease had indeed vastly enhanced the building at his expense going right back to the mid 1800’s. The resulting premium reduced substantially as a result.

 

Further thoughts on the proposed Leasehold and Freehold Reform Bill 2024.

The bill has completed its second reading and is going to the committee stage in the new year – it is worth noting the following effect on the proposed:

Abolition of marriage value

I have seen comment that the shorter the lease, the more impact this will have on the saving to a tenant. This is not true.

The greatest saving in marriage value happens between 40 and 60 years. To prove this, I analysed the effect of marriage value for 2 clients with ‘live’ claims.

The first has an unexpired lease of approx. 47 years – marriage value made up about 50.5% of the total premium payable.

The second had an unexpired lease of just over 10 years – marriage value made up about 19% of the total premium.

Consequently, if it is legislated that the prescribed rate to defer the landord’s interest is set (for a period of 10 years before further review) at say 3.5% –  the 47 year unexpired lease example will increase the overall premium by about 77% compared to what the premium would be if marriage value is abolished without adjusting the deferment rate from the current proscribed rates of 4.5% for houses and 5% for flats. The bottom line effect though will discount the overall premium (with marriage value) by about 12.5% whereas in the 10 year lease example, the premium will more or lease remain unchanged.

If the landlord’s reversion is proscribed at say 4.5% – the 47 year mid term lease example will increase the premium by just over 79% and 11% respectively whereas the short approx.10 year lease example the premium will reduce by about 13%.

We wait to see how the bill progresses on which I will make further comments in this blog.

However right now, it is hard to advise clients without knowing the exact proscribed rates the government intends to adopt to both buy out the ground rental income as well as the landlord’s reversion.

Leasehold and Freehold Reform Bill – will it all happen?

Today the government at last introduced in parliament the much anticipated legislation ‘to simplify and make cheaper’ the process of extending a lease or acquiring the freehold, the reforms having been on the cards since January 21 as reported on this blog.

The process though is likely to turn into something of a damp squib.

As much as the anticipated less contested proposals to

  • Extend an existing lease by 990 years on both flats and houses,
  • Remove the 2 year wait to qualify (as already applies on collective claims for the freehold on blocks flats); and
  • Increasing the 25% ‘non residential’ limit in collective claims is likely to reach the statute book.
  • Fix / prescribe capitalisation, deferment rates and possibly relativity and even a standardised on line calculator.

The more contentious proposals to :

  • Cap all existing ground rents to a peppercorn (as opposed to the previous proposal to cap all rents to 0.1% of freehold value for the limited purposes only of calculating the enfranchisement price), and:
  • Abolish marriage value (which will approximately half the premium payable on an existing lease of circa 40 to 50 years unexpired when converted to freehold / extended 100 year + lease) –

it will remain to be seen whether these seminal changes will reach the statute book.

Nevertheless government launched on 9th November a 36 point consultation paper on whether it should cap ground rents which runs to 21st December.

https://www.gov.uk/government/consultations/modern-leasehold-restricting-ground-rent-for-existing-leases/modern-leasehold-restricting-ground-rent-for-existing-leases

In respect of the abolition of marriage value reform  – there is likely to be severe challenge from freeholders and onward reference to Strasbourg on Human Rights issues which the government will be keen to avoid let alone whether there will be enough time to get all the proposals through before the next General Election.

Whether the government will have the oomph to get these ground breaking proposals through we will have to wait to see – watch this space.