Outro  0:01  
Welcome to the London property podcast, your go to source for navigating the complex and ever changing London real estate market. Our digital marketplace provides informative and educational content from industry leaders. Through podcasts and videos. We cover various aspects of the real estate experience, including buying and selling finance, law, tax construction, design, and more. Join us as we delve into the latest trends and developments in the market and gain valuable insights from our panel of experts.

Farnaz Fazaipour  0:34  
Hello, and welcome to London property, the home of super prime. I’m your host Farnaz Fazaipour And today we’re delighted to welcome back Katherine Simpson who is a partner at Edwin Co. and specialises in leasehold reform. Welcome back to the show.

Katherine Simpson  0:48  
Thank you for having me. So, Katherine,

Farnaz Fazaipour  0:50  
just to put our listeners on the same page as we are let’s talk about how the leasehold and freehold bill came about.

Katherine Simpson  0:59  
So it’s a bit like trying to work out how the First World War started. I think you can probably trace it back to around 2017 with the leasehold house scandal a lot of developers had built large housing estates all over the country. So the likes of Taylor Wimpey, Barrett, Bellway persimmon, and people thought they were buying freehold but actually what they were buying what 999 year leases, okay, akin to a freehold, but they included very often doubling grandparents or grandparents, it doubled every 10 years. So you can imagine, over the lifetime of the lease 999 years, the rents were going to be pretty enormous. They also had provisions in them. In many cases, that meant that every time they wanted to do something like paint the front door, or build a conservatory, they had to pay huge fees to these developers, and it was considered to be very unfair. It’s caused people a huge amount of stress. The Competition and Markets Authority looked into it, and a lot of the developers have actually agreed to forego those ground rents, some in exchange for RPI increases, but certainly not as onerous as they had experienced. So this then led the government to commissioning the low commission to recommend the reform of the leasehold system basically, to make enfranchisement easier and cheaper. Because a lot of the problems that these people had with that leasehold houses was how do they get the freehold. Now they were going to have to buy out those ground rents were they going to qualify. So it was seemed it was also going to be very expensive. So the Law Commission then produced about 101 recommendations. So in two reports published in 2021, the first to make and franchise meant easier, and the second to make it cheaper. Selling a leasehold house is a difficult concept, it’s often difficult to mortgage them, because if you’ve got a grandmom that outside London is 250 pounds or more, then it’s more easily forfeitable by a landlord. And the same thing with in London if the rents over 1000 pounds, which is obviously a much higher figure.

Farnaz Fazaipour  3:10  
So that’s why the tenants lease holders decided that 999 year leases let’s try and just go for freehold and then you saw that you’ve got to actually buy out the ground rent for 999 years before you can get the freehold. So it becomes impossible actually. It’s doubling. Exactly.

Katherine Simpson  3:28  
So this is the trigger for a whole reform of the system. And the Law Commission basically came up with 101 recommendations, and it was intended to be a root and branch reform. But that isn’t actually what has happened till after these reports came out in 2021. Everybody was waiting with bated breath to see what the government would take away from them. And I think it was probably as early as 2022 noises made by Gove about abolishing leasehold, reinvigorating commonhold abolishing leases of of houses. Very little of which actually made it into the bill. In fact, the abolition of leasehold houses has is a very recent amendment to the latest, the latest draft of the bill, and apparently it says abolishing leasehold homes. So what does that mean flats and houses?

Farnaz Fazaipour  4:15  
Right. So it was it is more of a vote vote winner than actually thinking it through. Yeah,

Katherine Simpson  4:23  
I mean, I really I would say that.

Farnaz Fazaipour  4:25  
Okay. So now what would you say? So what are the tenant lobbies seeing about all of this? Well, what are the top topics right now that you know it’s been going and it’s been debated for two years? Yes. So

Katherine Simpson  4:37  
I watched some of the Select Committee and I felt that it was quite heavily tenant buyer. So you had a group of women from the leasehold knowledge partnership, who I think at least one of them possibly all of them had Come on start with the whole freehold leasehold house scandal. And so it’s been termed leasehold or fake freehold and they will get In quite a lot of airtime and then felt was a huge amount of sympathy. They will also a call to abolish ground rent, which is subject to an ongoing government consultation, it doesn’t yet appear in the bill, quite how that will look. There are various options being considered including capping it at naught point 1% of freehold value. Tenants lobbyists are saying, let’s abolish ground rent altogether. But effectively you would be tearing up contract. So there must be enormous human rights issues for those freeholders who will be deprived of their legitimate ground rent income. And if you read the evidence on the on the House of Commons website, which I’ve set showing you, there’s an awful lot from a pension funds, charities who rely on these ground rent income streams, and might in my experience, actually, grand rent isn’t the issue, when it’s just sort of 100 pounds a year. So it seems bizarre to abolish it, particularly if you’re going to be basically tearing up a contract. How does that work?

Farnaz Fazaipour  5:59  
Well, it sounds to me like there’s two sides to this ground rent, there is the ground rent that’s been there since the Act was introduced in 93, and has always been swallowed up and part of the situation. And then there is the abuse by the developers of ground rent, which should be really a two tier solution, which

Katherine Simpson  6:18  
is why I think the ongoing investigation by the CMA is a good thing. And I think more and more house builders will come out of the woodwork over that because reputation, really, it’s disastrous for them to be seen to be fleecing people in this way. So that said that that’s welcome. But tearing up leases and saying right, brown rents over there must be a human rights issues now, because this didn’t form part of the initial recommendations by the Law Commission. It wasn’t it wasn’t actually considered in human rights terms, what was considered by the other aspects of the valuation, and the Law Commission got a opinion from a then case QC, obviously now, Casey, Catherine Halleck, Callahan, who wrote about the human rights issues arising out of the changes to the to the valuation methodology, which was being recommended, but but she wasn’t actually addressing the ground rent scrapping because that, at that point, wasn’t really on the table. And I think I think she would probably say, and I know that people have been seeking some advice from Human Rights Council, that there is quite a case for for for an effective challenge, which obviously could only be mounted on the law has been enacted.

Farnaz Fazaipour  7:31  
And so So, so leading on from this, what are the landlord groups, how are they responding to the reform? Well,

Katherine Simpson  7:39  
in terms of things like scrapping round rent, is that is there is if there is an uproar, and obviously, the valuation side, which I think you’ve got Justin Bennett talking about soon. I mean, there are some aspects of the reform that are not controversial. The ground rent scrapping is you have tenants group saying, Well, what are we getting in return for our ground rent? Now, the clues in the word rent, you are renting the land that your property sits on from from your freeholder, and I’m slightly wary of the whole rhetoric about feudalism and and because I think that fires people up in the wrong way. And there’s got to be a fair balance. People do accept generally within the market that there needs to be a reform of the leasehold system. It’s not completely broken. Yes, it’s open for abuse. But like any complex if you’re going to have abuses and, and things that don’t work quite well, a lot of the act is devoted to looking at service charges to keep costs down. So tenants can litigate against unreasonable service charges. And that’s all pretty uncontentious, that seems pretty fair. But there are aspects of the infringement of evaluation, which are giving cause for concern. The basic amendments to the to the qualifying criteria are generally not considered to be controversial. So for example, you’re going to get a 990 year lease not just 90 years, and zero ground rent, so you buy out the ground rent, it’s 990 is not 999. I was gonna

Farnaz Fazaipour  9:08  
say there was a logic to that I’ve forgotten that. So

Katherine Simpson  9:10  
the reason is that, as now at the 90 year point in the five year run up, a landlord is entitled to get possession if he wants to redevelop the building, which the plans contain that amendment yet, that’s as it exists. So it was the last year, the last year the original term, right. So the extended him for last five years. Okay, so the rationale behind 990 years is that the five years applies for every tranche of 90 years. You’re not just throwing it out to the end. Obviously, it’d be pointless. Yeah. Which is a whole other topic. So that to that song controversial scrapping the two year ownership is also pretty uncontroversial. It stops. Typical games of cat and mouse between landlord and tenant when people buy and they haven’t properly bought with the benefit of a claim. It’s very easy to come on stop. So that removes that,

Farnaz Fazaipour  10:01  
and also the subscribe form and making a mistake and how you actually fill it out. And who’s responsible. There is

Katherine Simpson  10:07  
all of that, but that this is what was expected that there would be the root and branch report hasn’t really appeared. So everyone is expecting the existing legislation to be literally torn up and started again, that hasn’t happened. So the ACT reads as basically a series of amendments pretty much it’s pretty, it’s pretty hard to read. And even the the chair of the Select Committee described it as being dry as dust. Right? So it’s, it’s tough reading.

Farnaz Fazaipour  10:33  
Okay. Glad you had to read an AMI. So then, if you had a magic wand, and the government said, Right, okay, lawyers value is, you guys tell us what’s the best way to do this? What what would be the things that you as a lawyer think should have been done in a different way?

Katherine Simpson  10:53  
Well, coming back to the point that you made about about notices. So the way notices are served drawn, stopping this whole said the game of cat and mouse and people got the notices slightly wrong. And then and then if they withdrew the claim, they couldn’t make another claim for 12 months, that actually is being removed. So that’s fine. But But there isn’t a wholesale reform of the system. So it’s a bit disappointing on many fronts, I think so only only really the bare bones have gone in in terms of qualifying criteria. One of the one of the other big takeaways is the the 25% commercial limit, which stops you collectively in franchising, where the commercial parts exceed 25% of gross internal floor error is being raised to 50%. So many more buildings will become in franchisable. But of course, there’s outcry from freeholders over that so you’ve got the likes of Grosvenor, you’ve got capital Argent in Liverpool, live Kings Cross who who’ve done fantastic new retail developments. So at the 25% level, they can be assured of, of keeping, keeping their freeholds. But now they, they’re going to lose lots of free holes. And the problem is that these commercial premises are going to be in the hands of people who don’t actually know how to manage them.

Farnaz Fazaipour  12:09  
Yeah, so I was gonna say then the other complications that people don’t think about is the actual day to day running.

Katherine Simpson  12:14  
All of this infrastructure is carefully considered infrastructure, growth in this big development in Liverpool, these places going to be in the hands of amateurs. I mean, it’s, it’s pretty frightening. It’s one of those sort of unintended consequences, of which there are many in the legislation. And but also, I think it’ll increase arguments amongst people collectively in franchising, because some will want to take over the commercial, others won’t now, and you can require landlords, that’s another change to take to demand that they take leaseback moment is it’s optional.

Farnaz Fazaipour  12:47  
So I suppose, as you were saying earlier, once it’s actually passed is when people can actually then start disputing it legally. And the landlord’s will get together on things that hadn’t really been thought out and practically will cause all sorts of issues and try and amend them. Well,

Katherine Simpson  13:05  
the Human Rights challenge can obviously only be mounted once you have once you have the the enactment. So that’s the issue and I had thought there’d be a lot of noise by landlords that which made the government perhaps reconsider things, but that the government seems to be holding absolutely fast on the on the valuation, which includes issues surrounding marriage value and how the premium is calculated the holding fast, don’t seem to be listening. But some people think that they will have to listen because otherwise they are going to face huge compensation claims. Yeah.

Farnaz Fazaipour  13:39  
Well, as you say, there are some good things about it. And I think that whole two year ownership and the you can’t serve notice if you fail the first time for another 12 months will definitely be well received by a lot of people. But in the state agency world, people are, you know, buyers are thinking they’re going to wait and get a deal. So that’s a topic on valuation. We’re here to discuss with Justin. But

Katherine Simpson  14:02  
one of the other contentious things is the fact that tenants will no longer have to pay landlords, reasonable recoverable costs. So that fair valuation costs and costs incurred in in the claim. That seems to me to be terribly unfair, because in any other compulsory purchase situation. landlords don’t have to pay their costs, if they’re forced to sell their property. Well, somebody has to pay the costs of that process, not the landlord, which

Farnaz Fazaipour  14:28  
actually makes me think of a question What about the fact that a tenant has to serve notice with a number that is reasonable in order to keep the notice valued, but the landlord can counter offer and be unreasonable? Is that going to be addressed?

Katherine Simpson  14:45  
No, that won’t change. Okay. No, that won’t change. I mean, I suppose the point about is is to stop tenants just putting in offers in bad faith. Right? And that that that will invalidate a notice

Farnaz Fazaipour  14:59  
will make Be the fact that the landlords are going to be paying for their own costs will make them be a lot more reasonable and keep it short and keep it cheap,

Katherine Simpson  15:05  
maybe. But I think part of the problem will be that you will have landlords who, therefore avoid taking proper valuation and legal advice. And there’ll be there’ll be much more fights in the courts. So

Farnaz Fazaipour  15:17  
Well, thank you so much for coming to talk to us again. And, you know, I would really like to keep in close contact with you so that you can keep updating us on what’s happening in the legislation. Thank you so much for your time. Thank you. We hope you really enjoyed that insightful discussion with Katherine and if you’ve got any questions about the leasehold and freehold bill, then do please get in touch with us and we will connect you with the right professionals.

Outro  15:40  
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