Comment by Mark Chick

Countryside Properties has joined Taylor Wimpey and Aviva in announcing it will end the doubling of ground rents on new build developments. 

Following an investigation by the Competition and Markets Authority, Countryside Properties will make adjustments to leases so that leaseholders will be able keep rents at the same level as when they first bought their home.

This is good news for leaseholders with 10-year doubling rents, or other reviews where Countryside is still the freeholder. 

It will be interesting to see whether Michael Gove, in his new role as Secretary of State for Housing, will push forward with the legislative agenda that Robert Jenrick, his predecessor, started.

The momentum behind leasehold reform continues to grow. 

In my article penned and published on 28^th July 2021 – and later picked up by FPRA in an Autumn update – I did speculate as to whether there would be others that would follow the lead taken by Aviva and Persimmon – (see the original July article that appears on this site).http://www.leaseholdinfo.com/mark-chick-fpra-newsletter-article-the-cma-investigation-article-from-july-2021/

Fast forward just eight weeks and another developer has joined the ranks of those prepared to make an adjustment to 10-year doubling rents. This is undoubtedly good news for those leaseholders. As to whether other developers will follow suit, we will have to wait and see. 

As I voiced in my July article, I suspect that this is a question of scale and those that have made this gesture are those where this is ‘easier’ for the freeholder to do, because of the number of affected units; I would speculate this represents a smaller proportion of their overall interests or, perhaps, is non-core to their other operations.

It is clear is that the agenda for legislative and cultural reform in leasehold had been set – it now remains to be seen how – and, critically, when, the politicians will follow this through. 

We do have a number of moves in that direction (the Commonhold Council) and the promise of a response from government to the Law Commission’s wider proposals for reform, which is to say nothing of the ground rent abolition bill currently making its way through parliament. 

Leasehold Reform News indeed. 

Mark Chick 

23.9.2021

The so-called ‘leasehold scandal’ has become one of the biggest topics of discussion in the leasehold sector. Many leaseholders who have found themselves with ‘time bomb’ or frequently doubling ground rents (those rising at intervals of 5, 10 or 15 years) feel exploited as they have found themselves bound to pay ground rents to their freeholder that will increase in cost at a rate that is faster than normal inflation and in the worst cases end up becoming so significant when compared to the value of their property that the flat becomes worthless.

In other cases, frequent doubling of ground rents (intervals of less than 20 years) will make their property often becomes difficult to sell or re-mortgage.

In recent years, regulatory authorities have begun to take a greater interest in the scandal. In addition to the draft legislation of the Leasehold Reform (Ground Rent) Bill, currently before the UK Parliament and which promises to abolish ground rents for new leases, the Competition and Markets Authority (CMA) launched its own investigation into the leasehold sector in September 2020.

The CMA’s investigation has focused on companies which have acquired or sought to grant leases where ground rents double at intervals of less than 20 years and, in the case of leasehold houses, where misleading or incorrect information may have been given about the likely cost of buying the freehold at a later date.

This is a significant step towards the regulation of the market and, together with the Leasehold Reform (Ground Rent) Bill, shows the Government’s willingness to clamp down on ‘abuses’ in the leasehold sector.

Although the CMA is yet to complete its investigation, leaseholders received a major boost on 23 June 2021, when the CMA received undertakings from Persimmon PLC and Aviva in relation to actions taken concerning ground rents and the sale of freeholds to leasehold houses.

These undertakings are voluntary ‘settlements’ or open commitments, which are likely to prevent further enforcement action. This means that neither company has admitted to breaching the law, but are acting in response to the CMA investigation. The undertakings are open and enforceable promises to take action to ‘correct’ certain behaviours.

As such, although the undertakings themselves do not prevent further investigation or enforcement being undertaken by the CMA, they are likely to have addressed the issues raised by the regulator in its investigation.

These are the first two undertakings published as a result of the investigation, but the CMA is continuing to investigate other firms, including Brigante, Taylor Wimpey, Barratt Homes and Countryside Properties, so we should receive further news on these investigations soon.

The undertakings from Persimmon and Aviva differ from one another, but both make commitments to reimburse leaseholders that have been forced to make ‘unfair’ payments in the past.

The Aviva undertaking applies not only to existing leases within their portfolio where the ground rent doubles at intervals of less than 20 years, but also to those cases where variations have been made already to change these ‘onerous’ ground rent clauses to RPI (Retail Price Index) reviews at the same intervals.

Aviva gives a commitment to change these RPI reviews to the original rent paid under the leases and to fix this for the remainder of the lease term with no variation. In addition, they offer to repay ground rent that has been overpaid, not only by any current owner but also by any former owner in cases where they still own the freehold.

In the case of Persimmon, there is a commitment to allow leaseholders to purchase the freehold of their leasehold house for the sum of £2,000 or any lesser figure that would apply under the 1967 enfranchisement legislation. This will include making repayments to homeowners who have bought their freehold for the difference between the price they paid and the £2,000 threshold.

In addition, Persimmon has agreed to increase the length of time for a buyer to get to an exchange of contracts under its ‘reservation agreements’ to 42 days in the case of leasehold properties, which will allow for proper advice to be taken by the buyer and avoid undue pressure in the sales process.

If you feel that you are entitled to such a repayment, Aviva and Persimmon have said they will contact those affected to reimburse the costs they overpaid and both companies have agreed to publish details of this on their websites. 

Leasehold campaigners have praised these moves and suggested that it can now only be a matter of time before other developers and freeholders follow suit. However, I am not sure that other freeholders are likely to want to return ground rents to their original value voluntarily.

In June 2019, around 70 large freeholders (including Aviva) signed a commitment given to Parliament and the Select Committee on Leasehold Reform – the so-called ‘pledge’ – which was an open commitment to convert onerous ground rent clauses to RPI reviews. Following on from this, in many cases freeholders have already made offers to do this and many leaseholders have already varied their leases in this way.

However, the ‘pledge’ does not go as far as the new Aviva commitment, which offers to take away even RPI reviews and to return the ground rent level to the initial level in the lease for the remainder of the lease term. The Aviva offer is also generous in that they are offering to repay ground rent paid over and above the initial ‘base level’ of the initial ground rent in any lease.

I think that it is unlikely that the 70 other signatories of the ‘pledge’ will follow suit with similar voluntary undertakings so soon after their initial commitment. However, with the CMA displaying an appetite to pursue a number of other institutional landlords, other large organisations may feel persuaded to offer a settlement and/or take steps to amend leases in ways similar to Aviva.

It is going to be more difficult for smaller or non-institutional landlords to follow the example of large companies such as Aviva and Persimmon. As such, I would be very surprised if there is any voluntary movement to reimburse ground rents among this group.

It is more probable that we will see action taken against the future sale of leasehold houses. This is, in part, because the Government has already made plain that it wants to see this practice discontinued. Furthermore, one of the key objectives of the Leasehold Reform (Ground Rent) Bill is to remove ground rent for all new leases – and so, a key incentive for freeholders to grant leases of houses will be removed.

Yet, although we can expect to see other developers give similar commitments to deal with freeholds, I personally doubt whether many developers will want to voluntarily fix a price to sell freeholds to leasehold houses as Persimmon has done. As a result, I would expect that any changes in this area are going to require further intervention from the CMA or Parliament.

The Aviva and Persimmon undertakings may also affect the market for freeholds. Aviva’s commitment to seek to make similar amendments to any leases that are brought into their portfolio may begin to set a ‘tone’ for the marker for freeholds where the leases have RPI, or less than 20-year doubling rents.

If this position were to be adopted across the market (which is a big ‘if’ at the moment as the Aviva position is currently ‘unusual’) then these sorts of freehold reversions will be down valued to take account of the fact that the rents are likely to be treated as being fixed for the whole lease term. The key question is then how such potential lease variations will now be ‘priced in.’  

For the investor there is the risk that the right to continue to receive a ground rent income of this sort may be prejudiced by the potential risk of a future need to repay. There will be a balancing decision for fund managers as to how to handle this. I anticipate that the overall values of the underlying assets will be written down to reflect this risk and that provision will be made for potential future repayment. It may be that this is already something that is beginning to have an effect. 

The Aviva and Persimmon undertakings can only be good news for leaseholders in the short term as companies show an intention to solve the ‘abuses’ of the leasehold scandal. Yet, it may not be such good news for the long-term stable income/bond market favoured by the pensions industry and annuity providers.

If that were to become the industry norm, then one of the most likely indirect effects may well be that the ‘capitalisation rate’ applied to ground rents in enfranchisement calculations will be subject to further decrease, based on market evidence and a change in how a buyer of freeholds will now look at the likely income over time.

If this happens, the cost of compensating for the lost ground rent income will increase, so there may be an indirect increase in enfranchisement costs elsewhere, which could negatively affect leaseholders in the long run.

So, while we wait to see if any other companies will voluntarily follow the commitments given by Aviva and Persimmon, which is undoubtedly good news for leaseholders, there may be some other unintended consequences that may affect other enfranchisement costs over time.

Mark Chick 

28.7.2021

What does the Duval case mean in practice? 

Duval v 11-13 Randolph Crescent Ltd [2020] UKSC 18

For those of us dealing with Landlord and Tenant law on a daily basis, the Duval case is troubling on a number of different levels.

What does the case say?

To recap, what the case effectively says is that if there is an absolute prohibition in the leases of a building against alterations, and there is also a covenant on the part of the landlord to enforce the terms of the leases and to keep the leases on similar terms, if the landlord wants to grant a consent for someone to undertake work which would otherwise breach the terms of the absolute covenant contained in the lease, that this not permitted.

The case operates on a number of levels, as the lease clauses themselves in the case were slightly unusual, but not entirely uncommon. There was a division between those works on which there was an absolute ban and those subject to a more “qualified” restriction.

Where the covenant is qualified (i.e. if it says that the consent of the landlord must be obtained) then there is generally a proviso implied by statute that this consent cannot be unreasonably withheld.

Of course, no such provision can be implied into a situation where there is an absolute bar and there is no opportunity in the clause as drafted for the landlord to give any kind of consent.

What does this mean in practice?

In many, many cases up until now, landlords (whether they are a freehold company owned by the residents, or an unconnected external landlord company), have granted consent for works or agreed variations of absolute restrictions found in leases often in exchange for a premium, in a situation where the flat owner wants to do work which would otherwise be prohibited under the terms of the lease.

To give an example, a fairly major piece of work by way of an alteration, or improvement such as removing a wall, might well be the sort of work which is not permitted but which is (subject to appropriate structural advice et cetera) the one that the landlord might be prepared to give consent to, especially if compensation is paid.

There are plenty of cases in existence already where these types of consents have been given.

The Duval case was decided by the Supreme Court in May of this year.

So, the question is really, after the 8th of May 2020, what happens to all of these types of consents in the future?

Well, it appears that landlords simply cannot give them – and this is troubling on a number of levels. Firstly, there may be works that are already in train under licences granted pre-Duval; these are now being carried out in breach.

Secondly, there may well be a two-tier system around consent for works which are going to be sought in the future where historically in a building the landlord has been able to (or prepared to) license these types of works, but now this is no longer possible. Landlords are going to have to explain to flat owners the reasoning as to why they have now moved to what will appear to be an inconsistent approach to identical works.

Why was the decision in Duval decided the way it was?

Let us not forget this is a decision of the Supreme Court and therefore has had full and careful judicial consideration.

There is an intellectual attraction in the logical consistency between covenants given on the one hand to keep all the leases on similar terms and to enforce the terms of the leases at the request and cost of the tenant, and on the other hand, a position under which the landlord, perhaps for their own gain, (or for other reasons) wishes to vary an absolute covenant that they have given in one of the leases.

A key feature of the thinking here is that when a flat owner purchases their leasehold property, or when they sign up as a party to the original lease, they are deemed to be aware of all of its terms. If the particular term of the lease is “absolute” then surely it is not something which is capable of variation?

I agree with the intellectual and logical consistency of this. The two clauses cannot sit hand-in-hand unless both remain as they are. This is no doubt what attracted of the Supreme Court to the decision that it made.

In addition, in Duval, the lease clauses were little “blurred” and the clause that contained the absolute prohibition in fact also referred to the covenant against committing what is known as “waste,“ which is a general covenant not to damage or destroy, or to carry out activity which might be detrimental to the property interests of the landlord.

However, the principle of this case holds good for all other cases.

So, what are the issues?

Well, the first problem is as mentioned above: that ongoing works might be compromised by the nature of this decision.

The second problem is one for the future, in the sense that consents that might have been given in the same form cannot now be given.

The third question is really what (if anything) can be done to work around the consequences of this decision?

I have given some thought to this and some ideas appear below:

Who does the work?

The covenant is likely to be against the tenant breaching the terms of the lease. In theory, if the landlord does the work rather than the tenant, then no breach will occur.

Where is the work being done?

Is the work being done to an area which is not in fact owned by the tenant under the terms of the lease? In other words, is the area in question is outside of the “demised premises”?

If so, is there an argument that, in fact, that the work involves dealing with something belonging to the landlord? This might be a trespass if it is not properly authorised, but it does not constitute a breach of the terms of the lease because the area in question is not covered by the lease covenants.

This will require some relatively creative interpretation and there is a risk that this might be seen as an attempt to subvert the absolute covenant given to the other leaseholders not to permit such breaches.

Often leases contain covenants not to alter the remainder of the building regardless of whether these other parts are demised to them, but in theory, (and this is likely to be specific to the drafting in the particular building), licensing work outside of the lease itself is arguably not covered by it.

What if everyone agrees?

What happens if you can obtain the agreement of every other flat owner? I would guess that if you can, that there should be no issue, because the landlord can then grant consent in breach of the covenant to keep all the leases on similar terms, and that no one can object because they have signed up to agreeing to the consent being given. This might be possible and a small block which is owned by the flat owners together in a freehold company provided that everybody is a member, and in agreement.

In a larger situation, with a landlord that is not connected to the flat owners, multiple votes would have to be ‘bought’ and the question would arise as to what would be “in it” for the flat owners in question. It would also only take one flat owner to object for the scheme to fail.

Clearly the larger the block, the greater the difficulty and the greater the risk.

Publish and be Damned?

What about an approach that says, let’s just do this and worry about the consequences afterwards (within reason, or not as the case may be!)?

In theory, if the landlord allows the work to continue in breach of the terms of the lease, or tries to grant a consent (that it cannot grant), this will be a problem and the leaseholder will have an unlicensed alteration.

The normal solution would be to provide a retrospective licence confirming that whilst the work was done in breach of the lease, that no action can be taken because the length of time that has elapsed; meaning that the landlord cannot pursue one of the more aggressive remedies available to it, such as forfeiture, or an injunction requiring the works to be undone.

Generally speaking, a breach of the covenant against unauthorised alterations is what is called a ‘once and for all breach,’ meaning that if the landlord acknowledges what has been done and does not act, that it will then lose its right to pursue the tenant for the breach in question.

Therefore, it might be possible to engineer a situation in which the tenant does the work, the landlord does not act and then confirms afterwards that it is too late to take any further full enforcement action.

The only other remedy available to the tenants that wish to object would then be an injunction, which once again, provided there is some delay will become much harder to obtain. Then finally, the question that will arise – as it always does where an injunction is concerned – is whether damages (i.e. a payment of money) would be a more appropriate remedy. This sort of arrangement is more likely to put those signing up to such a scheme in a position where the overall risk can be quantified and then dealt with between the parties as a matter of commercial negotiation.

Will such a scheme work?

There is clearly risk on both sides and there is a big risk to the landlord during the course of the breach of the lease, which both the landlord and the tenant are singing up to, that the other leaseholders may take enforcement action against the landlord.

This being the case, the landlord would need to obtain a full and sufficient indemnity from the tenant for the costs of dealing with the application for works and to cover the ‘litigation risk’ in this approach. This is going to frontload costs and not all landlords are going to want to proceed, or feel able to proceed, in this way.

What would the form of licence look like in a situation like this?

As mentioned above, the licence or permission would in fact be something which the landlord actually cannot grant, but the understanding between the parties would have to reflect two things at least – firstly, a full commitment from the tenant to indemnify the cost of all and any enforcement action which the landlord has to deal with as a result of the actions. And secondly, a commitment on the part of the tenant that, if requested by the landlord, that it would “back out of” the works and undo them if requested to do so.

The landlord could be put in a position where it is mandated by way of an injunction to take enforcement action against the tenant, requiring them to reinstate the work. If this happens, the landlord would need automatic cooperation from the tenant to be able to comply.

Licences to alter given in a residential context never normally contain reinstatement obligations. (This is an obligation to put the property back to the way it was before either at the end of the term, or at the request of the landlord). This is a common term in commercial licences of property such as shops et cetera, where after a shorter commercial term (say, five or ten years) the landlord wants the property back just the way it was before it was let. In the residential situation, the tenant is generally going to want to resist this sort of clause.

So, where does this leave us with consents to works after Duval?

These are just some of the issues which the Duval case has thrown up in practice and there are likely to be more that come to light as time goes by and its impact is considered in practice.

However, I am confident that there are ways in which the situation can be managed provided appropriate advice and careful consideration is given to what is required.

As ever, if you would like to discuss any of the points raised in this article, please do get in contact by emailing leasehold@bishopandsewell.co.uk

Mark Chick

15.11.2020

As you will probably have seen, the Law Commission has now published its long awaited report into the reform of the Law in relation to enfranchisement.

This has been accompanied by two other reports on Right to Manage and the introduction/ reinvigoration of Commonhold.

Further details of each of these can be obtained by looking at the Law Commission’s website. A link to this appears below:-

https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2020/07/ENF-Report-final-N8-3.pdf

and summaries are at

https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2020/07/ENF-Summary-final-N10.pdf

https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2020/07/Summary-The-Future-of-Home-Ownership-final-N2.pdf

The Law Commission’s summary document is easier reading as it runs to 16 pages rather than the 859 pages of the full report. I have also written a short summary note that appears here: see Note

If the majority of these reforms were to be enacted, there are a number of points which would be good news for leaseholders.

Commentary 

A very short overview of some of the key points appear below:

• Costs – The proposals suggest a change of emphasis in terms of costs, with tenants not needing to pay the landlord’s costs on enfranchisement.

• Lease extensions –A new right to extend to 990 years, not plus 90 years as is currently the case and a right to buy out the ground rent (only) if your lease is more than 250 years long. 

• Collective claims – The threshold for bringing a collective claim would be changed so that there would only be a ban on enfranchisement if 50% of the building was used for non-residential purposes. In addition, there is a requirement to retain their interest in non-participating units (by way of a ‘leaseback’), thereby reducing the overall cost of buying the freehold.

• Valuation – in a separate paper (published earlier this year in January) the Law Commission set out options to reduce the price paid on enfranchisement by adjusting the calculations in favour of the flat owner. These proposals are very political in nature, and hence a ‘range’ of options were presented for consideration by government.

• Flats and Houses treated the same – the proposals are that the same regime would apply to flats and houses and that many more properties that would previously not have qualified as houses to buy their freehold will do so (particularly those with leases of the internal parts only).

All of these proposals are part of the Government’s stated objective of making it “cheaper and easier” for people to buy their freehold or extend their lease.

That said, none of this is yet Law and these proposals from the Law Commission would need to be responded to by Government and, there would need to be sufficient Parliamentary time for these to be turned into Legislation.

The early indications that we have seen indicate that there may be some cross-party support for these proposals. However, as you will be aware, the Government has many other things on its plate at the moment, including the Coronavirus situation and also Brexit. In addition this is just a proposal from the Law Commission which Government have to respond to, but do not actually have to do anything with. History is littered with a number of very good Law Commission reports and recommendations which have not become law.

Will there be reform?

It seems logical to suggest that the answer to this is ‘yes’ but as to when and to what extent remains unclear. What is clear is that these reforms are at least 3-5 years away, if not further and might indeed not happen as mentioned above. This means that if you have a lease that is very short, or one that is approaching a ‘danger point’ in valuation terms such as 80 years, then delay is not an option. Even in other cases, recent market adjustments mean that now is as good a time as any (if not even better than normal) to be thinking about buying your freehold or extending your lease.

If you have any further comments or questions, please get in contact to discuss.

Mark Chick

Leasehold@bishopandsewell.co.uk

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