This article was first published on the Winckworth Sherwood website.
In this blog we pull together cases and legislative developments over the last 12 months relating to enfranchisement:
Leasehold reform (ground rent) bill – the Queen’s speech heralded the introduction of legislation to effectively set ground rent at nil in new residential leases subject to some exceptions.
These restrictions will affect Ground rent investors when granting voluntary lease extensions to flat owners and developers may lose out too as the price they had to pay to secure the site will have assumed some realisation of value from a ground rent income stream. Where the developer holds a lease of the site the freeholder may also be impacted.
The commencement date remains to be confirmed. When these proposals were first announced in 2018 the Government intimated the effect would be backdated to 2017 so that remains a risk despite what has been said in the meantime.
For the detail around this see our article https://wslaw.co.uk/blog/queens-speech-ground-rent-reform/
Enfranchisement reforms & Commonhold – The Government has not announced the introduction of legislation around the recommendations it has received from The Law Commission on enfranchisement and commonhold. However a Commonhold Council has been created. Is it interesting to note that the technical support group to be appointed alongside the council will include Hazel Easthope of the University of New South Wales, who will no doubt provide insight from the strata system used in Australia.
Flat owner’s ability to create permanent rights and so improve on their leasehold position by collectively enfranchising the freehold – flat owners’ right to collectively acquire the freehold extends to areas they use in common as of right under the terms of their flat leases i.e. parking and garden areas. The freeholder can satisfy that claim with an offer of permanent rights. Either way the freeholder’s ability to develop any retained land may be stymied as a result. The extent of existing lease rights can be unclear; they may be implied so not apparent on the face of the leases. Freeholder’s who have granted licences, i.e. to park, can be surprised to find these permissions converted into permanent rights.
In the Upper Tribunal case of Ashford v Mill Court Walton Ltd [2021 UKUT 0011] the claiming flat owners argued that they had an implied right to park. They relied on the planning consent for the development requiring parking spaces to be laid out and made available for use before the dwellings were first occupied on conversion, certain pointers in the lease and evidence that the original freeholder had permitted parking. The Upper Tribunal found against them. It didn’t help that the lease of Flat 1 held by the freeholder benefitted from an express right to park. So the flat owners were left disappointed and with unfortunate clarification they had no such right under their leases which no doubt adversely affected the value of their flats.
The position would have been very different if the original freeholder’s consent to park had been continued by the current one as in that case the licence might have been converted to a permanent right following Trinity House of Deptford Strond v 4-6 Trinity Church Square Freehold Limited where the flat owners managed to acquire permanent rights to use a garden they had only been permitted by a revocable licence to use previously.
Unfortunately the lesson for landlords is to revoke any such licences so that they don’t lose more land than they might on an enfranchisement claim.
Hope development value – the Upper Tribunal decision of House of Mayfair Limited [2021 UKUT 0073] is unfortunately another example of enfranchisement rights pitting a group of flat owners against another who held the freehold; the top floor flat owner had acquired the freehold nine years earlier for £14,500 before being dispossessed by the other four flat owners via an enfranchisement claim for £22,000.
He was disappointed, appealing on the basis the figure should have been £11,000 higher at £33,000 to reflect the possibility of creating another flat at roof level despite not having sought planning for that during his period of ownership and it only being possible to develop in this way if the top floor flat owner gave up part of their land to enable the access stairs to be extended up to that level.
The case demonstrates that freeholders pushing for compensation under this heading need to think carefully about the development that might realistically be undertaken and provide evidence as to the value that will flow from that into the freehold interest. In this case an extension of the top floor flat was seen as the only potential development but this wasn’t relied on by the freeholder in evidence.
Valuers working up the residual valuation were reminded not to rely on figures from other FtT decisions; here the valuer adopted development costs from its decision in Francia Properties Limited v St James House Freehold Limited despite the Tribunal having explained in that case why Tribunal decisions on factual matters such as that can’t be relied on. It was pointed out that was in a different location and already had access to the roof.
Freeholders may be motivated in cases like this to make the physical changes to enable their preferred development to proceed where they can and to obtain planning for that and as insurance against the freehold claim being made.
Disregarding tenant’s improvements – the Upper Tribunal’s decision in Alberti v Cadogan Holdings Limited [2021 UKUT0085] determined that a house must be valued as it was laid out prior to the tenant’s improvements being undertaken and consequently the authorised planning use that flowed from those improvements should be ignored.
This had a huge impact on the price payable as the cartoonist and illustrator Gerald Scarfe had over a number of years restored 10 Cheyne Walk to a single house from its original layout as five separate flats and it had acquired authorised use to that end. If you assumed the house was laid out as flats now he wouldn’t be able to get planning to put it back into use as a single house.
The valuation gap was £2.6million v £11million. That drove the case as evidenced by Martin Roger QC’s comment that it was not a controversial proposition that the value of improvements must be disregarded at each stage of the assessment of the price in view of the Land Tribunal’s decision in Sharp v Cadogan concerning another house claim; the various other authorities from different statutory and contractual context submitted by the respective parties were found not to assist.
When calculating marriage value for an enfranchisement claim outside prime Central London in the absence of comparable evidence then the Prime Central London graphs of relativity produced by Savills and Gerald Eve should be used instead of the five non-PCL graphs of relativity from the RICS 2009 report in this regard (Deritend Investments (Berkdale) Limited v Treskonova [2020] UKUT164 (LC)).
Right to manage succeeds in respect of a block of studio flats occupied by students – in the Upper Tribunal case of Premier Grounds Rents No.6 Limited v North Street (Management Company) Limited [2020 UKUT 0197] investors holding the studios on long leases that sublet them on a short term basis to students weren’t prevented from exercising the right by the nature of use as student accommodation such that it wasn’t their home. What counted was what the premises were constructed or adapted for use as.
Shared Ownership leaseholders can qualify for enfranchisement rights without staircasing – The Upper Tribunal clarified this in the right to manage (RTM) case of Avon Ground Rents Ltd v Canary Gateway (Block A) RTM Company Ltd and another [2020] UKUT 358 (LC).
Unfortunately this is not the boon for those leaseholders who have not staircased that it appears to be as the requirement that the extended lease be at a peppercorn rent implies that they would have to staircase to 100% as part of the extension which they may not be able to afford to do. They would only be saved from this problem if the intermediate landlord is a Charitable Housing Trust and the flat is provided pursuant to its charitable purposes.
Absent that their landlord cannot help the shared ownership leaseholder by extending their own lease (at full cost) so as to be able to in turn extend the shared ownership leaseholder’s lease on terms that do not require the remaining share of equity to be acquired at cost.
So ironically this decision may effectively frustrate the ability of some shared ownership leaseholders and their supportive social landlords to extend where they do not have 100% equity. It leaves them reliant on the freeholder being open to negotiating terms for a new lease against a background that they cannot in practice be forced to do so.
This problem will be removed for Leaseholders if the reforms the Government introduces follow the recommendations made in the Law Commission’s report 21 July 2020, “Leasehold home ownership: buying your freehold or extending your lease” however they lose out when it comes to acquiring the freehold.
Mark Vinall, Partner at Winckworth Sherwood
