Blog Post No. 144
Leasehold Enfranchisement: Proposed Changes, Costs & Exemptions
Katherine Simpson is a Partner at a London law firm and recommended by Legal 500 UK for the year 2022.
Katherine is a recognised expert in the specialist field of leasehold enfranchisement, particularly renowned for her expertise in the Leasehold Reform Act 1967.
To connect with this expert, email us at email@example.com and we will put you in contact with Katherine.
Unknown Speaker 0:00
London Property, home of super prime, where you can find informative educational and entertaining content, covering all aspects of property.
Farnaz Fazaipour 0:10
Hello, and welcome to London Property, the home of super prime. I’m your host Farnaz Fazaipour and today we’re in conversation with Katherine Simpson, who is an absolute authority on the subject of leasehold enfranchisement. We’re very welcome to our show.
Katherine Simpson 0:26
Thank you for having me.
Farnaz Fazaipour 0:27
So why don’t I let you introduce yourself? Katherine, please tell us about your experience that got you to here today.
Katherine Simpson 0:34
Okay, so I’m a partner at Edwin Coe. I’ve been there since 2018. Previously, I was with a firm called Liam Pembertons, and which became Pemberton Greenish. I joined them in 1993. So it’s quite an auspicious date in terms of leasehold reform, having trained in the city, and I was determined to go into property absolutely determined against property. Of course 1993 9193 when I was training was the last property downturn, we will remember 1992 and 15% interest rates, but I was absolutely determined to get into property and I had to write 50 Letters by hand, I got two replies, and one was from Damien greenish. And I was brought in to do everything for the club and state, the trainee who they were given the job to decipher skincare travelling with her boyfriend. So just total serendipity. And I stayed there for nearly 25 years doing everything to this date. But I began to specialise in in franchising in 2000. So since then, I’ve done in franchise and for other bigger states, and since moved to Edwin Coe. More really, for individuals, high net worth individuals, anybody who owns property and has a has a enfranchisement issue. I’m there.
Farnaz Fazaipour 1:45
So that must have been really exciting times to be in Quebec going to state because it was the beginning of the reform.
Katherine Simpson 1:51
Exactly. It was very, very exciting. So I got involved in lot of 1967 that cleans, which you’ve there are far fewer of those now. And actually my particular area of expertise probably is that the 1967 Act, and you’ve got complicated basis evaluation, work very closely with valuers who have particular expertise in short leases.
Farnaz Fazaipour 2:13
Well, we’re definitely going to have to have you back on the show because there’ll be so many things to talk about. But today we’re going to concentrate on the white paper that came out in January 2020. Which I think since the leasehold Reform Act was introduced, all the changes that have happened have always happened in favour of the tenant mainly haven’t met.
Katherine Simpson 2:33
I mean, the whole part of the law Commission’s consultation was based on making in franchise meant easier and cheaper. So the first report came out in January 2020. And that was on options to make it cheaper. Second one came out in July. And that was to make the process much simpler and easier and less of a game of cat and mouse because we all know, those of us who specialised in this field, but there have been so many cases that have gone to tribunal to courts, where, you know, landlords have fought on technicalities. And the whole idea of the reforms, in terms of the process is to stop that game of cat and mouse. And we’ve all played it to some degree probably at some point.
Farnaz Fazaipour 3:20
Yes. Tell me about it. So there’s been in the white paper that we’re going to going to be the subject of our discussion today. There’s been about 102 amendments. Thank you for sharing that with me ahead of time. And there was some really interesting things that came about. What are the main issues that do you think this consultation is actually addressing?
Katherine Simpson 3:40
Well, when anybody wants to in franchise, the first thing they’re going to think about as a tenant, I use the word landlord tenant rather than lease holder. It’s just it’s just easier is how much is it going to cost them in terms of premium or price. And very often, a large element of that price is marriage value. If your lease has a term of 80 years, or less unexpired, you’re going to be hit with marriage fairly. And so I would say that the key recommendation is the potential to abolish marriage value. My view is that if it’s abolished, it’ll come back in some other and some other guys. But there is the programme of reform is not clear. There’s no clear programme of reform, as part of the consultation. They went to a QC or now Casey, Catherine Callahan. Who said that, potentially, there is there’s a human rights issue if landlords are not properly compensated. And that’s that, you can see that that may well be something that landlords, the big landlords get together and take up if there was ever a clear move programme to abolish marriage value.
Farnaz Fazaipour 4:49
So we’ve got a long way to go. Because once something’s decided then then you might actually have a group of people getting together and saying, No, we don’t want to accept that. So it’s a long road that we’re working acing, I could see that happening. The consultation paper is, is addressing some issues. So is the valuation the biggest issue?
Katherine Simpson 5:08
I think it is because it’s what people think first think of when they’re going to extend they think how much they’re going to cost me.
Farnaz Fazaipour 5:14
And what do you think is the worst thing that it’s it’s addressing the consultation paper?
Katherine Simpson 5:14
I mean, in terms of the valuation there are, there are basically there are, there are seven sub options and they’ve got you’ve got the options to remove marriage value or to have hope value or to abolish it altogether. And you’ve got seven sub options. And some of them replicate what happens at the moment. For example, you disregard tenancy improvements, you give a discount for holding over at the end of the term. And there is there is a thought about having a naught point 1% cap on capitalising the ground rent, which I think is unfair if you have an onerous ground rent known as ground rent, it’s generally considered to be one that is naught point 1% of freehold value, then that should be capitalised to assess the loss payable to the landlord, it shouldn’t be capped.
Farnaz Fazaipour 6:09
In regards to lease extensions, what are the main proposed changes?
Katherine Simpson 6:13
Okay, that you have a uniform right for houses and flats, you don’t have this thing where you have to say, is it a house and we know there’s been so much litigation about what is a house a seemingly simple concept, or a flat list litigation about flats got this uniform concept of, of a dwelling unit. So right to extend your lease for nine, nine years. So 990 years, which seems like an odd figure. Currently, it’s 90 years. But that’s because they’re going to throw out the redevelopment to every last five years of every or every 90 years, which is why you get to 990. And that’s going to be at zero ground rent, and strictly on the same terms as the existing lease.
Farnaz Fazaipour 6:57
And what does redevelopment clause mean?
Katherine Simpson 7:01
That entitles the landlord to get possession of the dwelling, if he intends to redevelop the premises. So he has its redevelopment right, and that will be exercisable in the last five years of the extended term.
Farnaz Fazaipour 7:17
Katherine Simpson 7:18
Currently you you’re entitled a 90 year extension, and LANL has redevelopment break in the last 12 months of the original term. I think that’s probably still intended to apply. And then in the last five years have the 90 year extended term. But if you’ve been granted nine, nine o years, the last five year redevelopment attaches to each tranche of 90 years. That’s the idea behind that.
Farnaz Fazaipour 7:43
And what does the landlord have to do in order to qualify to exercise that right?
Katherine Simpson 7:47
He has to show that he has an intention to redevelop the whole or part of the premises, the building which the premises are contained.
Farnaz Fazaipour 7:56
So that means planning, approval, money in place, yes, etc.
Katherine Simpson 8:02
Settled intention. Okay.
Farnaz Fazaipour 8:05
And is there anything else being proposed for lease holders, so how long they own it for or things like that?
Katherine Simpson 8:13
So the plan is to remove the two year qualifying the ownership requirement, which doesn’t currently exist if you’re doing a collective claim, you don’t have a two year ownership requirement, you can join in as soon as you buy a flat in a building, but it does currently attach to claiming freehold of your house or an extended lease of your house or an extended lease to move your flat so that to your ownerships going to be removed.
Farnaz Fazaipour 8:38
So it’s going to bring it more in line with the collective enfranchisement so that you kind of start on the same footing as an individual.
Katherine Simpson 8:44
Exactly, and it removes the whole technicality of selling something with the benefit of the claim because as the seller, you’re the one with the two year ownership, your new buyer doesn’t have it. And it’s a it’s a trap for many people it goes wrong. And again, it just encourages landlords to play to play cat and mouse with people. So you remove that element of uncertainty and potential for error.
Farnaz Fazaipour 9:07
So we just was discussing the leasehold and then the collective enfranchisement is when the group of owners so what how does that work? What do they have to qualify? In order to do that?
Katherine Simpson 9:19
Yes, you have a group of tenants I’ll call them tenants who all own long leases in the building, they can get together to claim their freehold so long leases at least more than 21 years. So that’s would be the qualifying interest. And as I’ve said with collective teams, you don’t need to have owned your flat for two years. But there are other restrictions on collective claims. Not everybody is can join in as it can be invited to join in if you if you’re not needed for numbers, then you can be left out by your fellow lease holders. So now there’s going to be a right to participate if you want to. Currently there’s a limit of 25% commercial premises in a building with with which is in mixed use If the commercial parts exceed 25% of the internal floor error of the building Taken as a whole, but excluding common parts, you’re not going to qualify, that’s going to be raised 50% or that’s the plan. The disqualification that if you owned three or more flats in a building, you don’t have a qualifying interest that is going to go. So there’s quite a lot of intended changes. And there are also some ones that, you know, are intended to cure quite unpleasant ills of collective claims. For example, if you have a commercial building, and there’s but it’s not more than 25%, so you still qualify landlords who really don’t want to let go the freehold will make it impossible for tenants to claim the freehold in financial terms by not seeking lease backs of the commercial parts, which they are entitled to do, so that they still get their income from their shop or art gallery or whatever it is, but some of them will actually deliberately not counterproposal leaseback because they know, the tenants just won’t have funds to cover off the commercial element of the building.
Farnaz Fazaipour 11:09
So another thing that I came across in the white paper was fleecehold, and I’ve never heard of fleecehold. So is that something that you just addressed? Or is it something else?
Katherine Simpson 11:23
I know, I know about fleecehold. And actually, I’m sure it’s probably going to find its way into the, into the Oxford English Dictionary. In fact, I Googled it. And yes, it’s basically a reference to two very onerous terms, typically in transfers of freehold houses, or leasehold houses that developers put in. That meant that, you know, you’ve had an absolute bar against alterations, which meant that if you want an even to hang a picture on the wall, your landlord would could charge you, you know, ridiculous amounts of money. So that’s where the term came from. I think it was actually coined by an old friend of mine who sadly passed away called Louis Burns, who was very well known for championing leaseholders rights all over the country, particularly people who had bought freehold houses from developers with onerous doubling ground rents, you know, very innocently had no idea that they had these onerous rents and and onerous service charges and, and payments for all these permissions. So that’s where it came from.
Farnaz Fazaipour 12:26
And this is actually a topic that’s been quite important in encouraging reforms, isn’t there yet, because the developers were taking quite a lot of advantage of of some of these potential loopholes.
Katherine Simpson 12:38
Exactly. So the developers were well known for, you know, particularly on small house, housing estates all over the country, selling freehold houses. And that is something that I will, I’m sure will be abolished freehold houses with these onerous rents. But of course, we’ve since then, we’ve had in the summer, we had the leasehold reform ground rent act 2022, which is means that whenever you grant a new long lease or house or a flat, the rent has got to be a debit 100 grammas. Of course, that doesn’t help existing lease holders, many of whom are still start with these onerous rents. And the Competition and Markets Authority is conducting an investigation into all of these developers who granted leases in these terms, some of whom have sold on to pension funds. And there a lot of them are actually agreeing to remove the doubling ground rent provisions for something more palatable.
Farnaz Fazaipour 13:38
Just voluntarily agreeing to do it.
Katherine Simpson 13:40
Yes, because otherwise, they may well face litigation, which will be expensive and reputationly disastrous.
Farnaz Fazaipour 13:48
So we talked about collective enfranchisement and some of the reforms that are being proposed. Now, some landlords are actually exempt from having to sell their lease extensions, who are these landlords?
Katherine Simpson 14:03
Typically, one thinks of the crown and the National Trust. So the crown is basically exempt from the legislation except there’s a parliamentary undertake which says they will be bound by it by analogy, except in certain areas, which are known as excepted areas, and those the areas of particular sort of historical importance to the crown, so they will grant extended leases, the National Trust will only grant 50 year extensions. As far as I can see from the Law Commission reports, I don’t think there is a plan to change the Crown’s position. So the National Trust may be obliged to sell freeholds pursuant to statutory claims, but with an option to buy the freehold back. If the claimant sometime in the future wants to sell.
Farnaz Fazaipour 14:55
And they have to go back to the National Trust. They can’t sell it to an outside.
Katherine Simpson 14:59
Yes, it will have arrived to effectively a right of first refusal for National Trust because they’ve got their heritage properties in many cases.
Farnaz Fazaipour 15:06
Can you please explain to our listeners, what are the costs associated with buying a lease extension or getting a collective enfranchisement? And what are the proposed changes to make that better?
Katherine Simpson 15:20
Currently, obviously, claimant tenants pay their own legal and valuation costs incurred in connection with the claim. But they are also obliged to pay the landlord’s recoverable legal and valuation costs incurred in that process, not their negotiation costs, and not any costs that they incur in going to the tribunal if tribunal proceedings are required, or if court proceedings are required for whatever reason. And you know, these costs can be high. The plan now is for there to be no contribution towards landlords costs if a valuation methodology is adopted. So in other words, if there can be no discussion about valuation, it is simply a method and you punch the numbers in and that’s the answer, then there’ll be no obligation for the tenants then to pay the landlord’s costs. If that if there isn’t that methodology, and valuations still a bit of a free for all, then there’s going to be probably a fixed costs regime. There were murmurings about landlords not being able to recover any of their costs at all, from the tenant. And I, I feel that’s unfair, because landlords don’t ask to have these claims made against them. And it’s, that whole thought is predicated on, you know, the big grand landlords know, through plenty of, of small landlords, you know, the little old lady who’s in who’s inherited a house that’s divided and flats, and she’s so she’s got tenants in the building, why should she have to pay their costs if they decide to claim the freehold, or extended leases against her.
Farnaz Fazaipour 17:00
And there’s something else in legislation which puts the onus on the tenant to get the offer that meets the landlord has to be accurate, or their notices invalid, whereas the landlord can say whatever counterclaim that they want to say, which then brings in a whole load of other professionals who are going to rack up the costs while they negotiate this discrepancy. So that’s something that’s going to be addressed with the whole process valuation reform.
Katherine Simpson 17:30
I think that yes, that’s that will be part of the whole process of the reforms in terms of making it easier and simpler. So there are less traps for tenants to fall into. And you’re absolutely right. If a tenant makes a counteroffer, an opening proposal that is so low is to not be regarded to have been made in good faith, they run the risk of the landlord, arguing that the notice is invalid, then of course, you have all sorts of tooing and froing, expensive arguments, and it can become a bit of a war of attrition, as I say, a game of cat and mouse.
Farnaz Fazaipour 18:00
Another thing is that landlords can actually also voluntarily go into negotiations to sell their lease extensions. And if a landlord goes voluntarily into such discussion, then they’re taxed differently. Is that right?
Katherine Simpson 18:14
Yes, I mean, many of the of the largest states will will not enter into voluntary transactions, because they won’t be able to benefit from rollover relief on the capital gain. That obviously is realised when in the premium paid. And if that if that gain is reinvested, if the premium is reinvested, then you get rollover relief, but you don’t get it if it’s a voluntary transaction.
Farnaz Fazaipour 18:43
It’s really a fascinating areas. And there’s so many different things. If it’s too, we’re pulling it. So what do you think is the history of leaseholds? How could they have come about? Why did they come about?
Katherine Simpson 18:56
Well, I people talk about it being feudal and medieval. And it doesn’t exist on the continent. Why does it exist here? I have a theory that it may in partly be due to our inheritance laws where we have this rule of primogeniture, where the eldest son inherits inherits the land, the second son, you know, goes into the army, the third one goes into the church, which means that unlike in France, for example, land is not broken down and shared amongst people amongst the family. So you have somebody who effectively is burdened and and I have the view that the leasehold system began in part by landlords who needed to have some income in order to look after their property. So the easiest thing to do was to grant long leases for premiums so that they could then have some money to to look after the property. And of course, at a time after the First World War, when lots of rent restrictions came into force, the income was was dwindling. So the easiest thing to do was sell long leases at premiums.
Farnaz Fazaipour 20:04
I guess on the flip side, to be fair to landlords, and I think you touched on the subject of human rights, that if you don’t actually cover all the bases when you come to giving the right to the tenant, and then you shortchange the landlord, when they have to sell long leases, etc, you’ve got to make sure that they’re paid everything that they’re due.
Katherine Simpson 20:24
Got to be properly compensated, otherwise, there are human rights issues. Absolutely.
Farnaz Fazaipour 20:30
Talking about voluntary transactions. So we’ve discussed the tax issue, but voluntary transactions when it comes to freehold houses. Can you tell us more about that?
Katherine Simpson 20:42
Well, it would apply to freehold houses or leases, if somebody’s extending their lease, voluntary transactions or contracting out are going to need approval by the tribunal. So any agreement purporting to exclude or restrict rights is going to be void and has to have the approval of the tribunal so you can’t have landlords, forcing pressurising tenants into doing deals on on extended leases or freehold claims, they have to be approved by the tribunal was the moment you can just have a voluntary deal. But as a tenant, you might, you might be fleeced by your landlord.
Farnaz Fazaipour 21:17
So we had the white paper come out in January 2020. And in January 2021, after a period of consultation, the government came back with some proposals. So what are the high level discussions what what what do they mean for us?
Katherine Simpson 21:32
So so having looked at both of the law commissioners report, so the one in January 2020, on making in franchise much easier and cheaper. And then there was the one in July to make enfranchisement easier, which is more on the process side. Government came back on seventh January 2021. With its announcements for reform. I mean, nothing has happened and there is no clear timetable or programme for reform as things currently stand, but they distilled the recommendations. And they particularly highlighted the proposal for a right to extend your lease to 999 years at a peppercorn rent, reduced costs, abolition of marriage value, zero ground rental nor new leases, which has now happened because as I said, we have the 2022 Act prescribed rates for the capitalization rate deferment rate and relativity which will form part of the of the calculation methodology, restriction on development value, an online calculator and a common hold Council to discuss commonhold. So those are the things that they they picked out. But as I say, nothing. Nothing has happened since then.
Farnaz Fazaipour 22:44
Well, exciting times when they do happen so we can see how the market takes those on board and we would love to welcome you back and talk to you again.
Katherine Simpson 22:52
I would love to come back. Thank you, Farnaz.
Farnaz Fazaipour 22:53
Thank you very much for talking to us and to listen to Katherine and other experts who we have discussions with on various aspects of the real estate market, please head over to our platform and choose from our list of podcasts with experts like Katherine.
Unknown Speaker 23:12
Thanks for listening to the London Property podcast, head over to www.londonproperty.co.uk and subscribe to our newsletter to receive latest updates.
Today we touch upon the history of leaseholds and focus on leasehold enfranchisement, examining the proposed changes for lease extensions as outlined in the January 2020 consultation paper.
We talked with Katherine about the expenses of obtaining a lease extension or collective enfranchisement, reforms that are being suggested, and who is exempt from them.
Leasehold extension and leasehold enfranchisement are two related but distinct concepts in the context of property ownership.
Leasehold extension refers to the process of extending the length of a leasehold, giving the leaseholder more time to occupy the property. This can be done by negotiating with the freeholder or through a legal process.
Leasehold enfranchisement, on the other hand, is a broader concept that includes the option of extending a leasehold but also gives the leaseholder the right to purchase the freehold of the property, giving them full ownership rights.
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