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28 Jan 2022

Leasehold reform: Introducing mandatory leasebacks in collective enfranchisement claims

When a group of tenants make a collective claim for the freehold of their building, there is very often a division between a majority who participate in that claim and a minority who do not participate.

Under the current law, the participating tenants acquire the freehold of the whole building and pay for the value of that whole building, including the landlord’s reversionary value in the non-participants’ flats.

The consultation proposes the introduction of a new measure, which would entitle the participating tenants to require the landlord to take leasebacks of the non-participating tenants’ flats. The idea behind this is that, in so doing, the price payable for the freehold will be reduced, because the participating tenants are not paying for the inherent value in the non-participants’ flats (with such value being retained in the leasebacks held by the landlord).

It is difficult to know whether a group of claimant tenants would take up this option if it were available. At face value, it might hold some attraction to those claimants, if it serves to reduce the price payable for the freehold. However, it also creates a more complex, and potentially messy title structure. Currently, if the claimant tenants acquire the freehold, they take the freehold of the whole building (usually through a nominated company) and become the direct landlord of the occupational tenants (be they the participating tenants or the non-participating tenants). In effect, the title structure is preserved, but with the claimants’ company taking the role of freeholder and landlord to the occupational tenants in place of the previous freeholder.

If, instead, the previous freeholder is granted leasebacks of some of the flats, a new title “layer” is created for those flats. The claimants’ nominee company is the direct landlord of the occupational tenants of those who participated in the claim, but when it comes to the non-participants’ flats, the old freeholder is a headlessee, with an intermediate interest between the new freeholder and the occupational tenants of those flats. That has the potential for management issues.

Similarly, from the perspective of the landlord being required to take leasebacks, the proposed reform would result in that landlord being forced to accept an interest in this building (ie. a lease of a single individual flat) and the role of a landlord to an occupational tenant of a single individual flat. That is inherently different to the type of interest (of a whole building, providing the ability to manage that building as a whole) which it first chose to acquire.

Given this last point, there is every chance that, once again, landlords will raise objections. However, the Government may need to consider a wider political aspect to the proposals relating to collective claims. The introduction of mandatory leasebacks, or probably more likely the increase in the non-residential limit to 50%, runs the risk of companies deciding to cease investing in large-scale mixed-use urban regeneration. For any serious investor, these measures will be seen as increasing the risk, diminishing its control over a building and making it more difficult to manage properties for the long term. At a time when the Government has committed to raising housing numbers, it needs to consider the potential for creating a disincentive for development of a critical part of the market which might deliver that additional housing.

One final note as to the format of the consultation. As mentioned above, there is a sense that the Government may have already made up its mind as to the outcome of this exercise. However, what is also of concern is the approach to the structure of the questions to which answers are sought. Many are framed along the lines of “yes/no/don’t know”. Any of us familiar with the field of enfranchisement legislation will be well aware that there are few, if any, aspects which lend themselves to a one word answer. If the Government is truly committed to an open-minded consultation, it needs to afford all respondents, on both sides, an opportunity to expand on their replies, and give proper weight and consideration to what will undoubtedly be nuanced answers.

The consultation invites replies, and runs until 22 February 2022.

This article concludes the four part series. 

The reform of leasehold enfranchisement

Click below to download a PDF outlining the full details of the government proposal to reform the future of homeownership in England and Wales.

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