Comment from the Association of Leasehold Enfranchisement Practitioners (ALEP), Written by Katherine Simpson, Partner at Edwin Coe LLP
The Leasehold and Freehold Reform Bill is making its way through Parliament at speed, having been first introduced in November last year.
This article considers the impact of one significant change to the existing legislation, namely the proposal to raise the 25% non-residential limit in collective enfranchisement claims to 50%. This proposed has been welcomed by leaseholders and will almost certainly be enacted. But the amendment, whilst not as controversial as other proposed changes, will have a much greater impact on landlords and the commercial property sector than might at first glance have been appreciated.
A number of landlords, including the Grosvenor Estate, submitted evidence to the Select Committee challenging the proposed increase and highlighting the need to explore the unintended consequences of the proposal.
Fragmented ownership of the high street
One of the critical issues is the fragmentation of ownership of our high streets. Many areas of historic value and importance have been successfully managed in single ownership for as long as they have existed. But as a result of the proposed change, the ownership of mixed-use buildings on our high streets will be fractured and diversified. Cohesive management of mixed use blocks will be undermined, resulting in a fall in standards of maintenance.
Impact on investment
This will then jeopardise capital investment and rental income from commercial premises.
Not only will property developers be disincentivised from investing in mixed-use buildings, but developers of new mixed use buildings will undoubtedly seek to ensure that the residential parts comprise less than 50% to avoid tenants seeking to manage the building despite the fact that residential investment currently out-performs commercial investment and that the housing crisis requires a swing the balance in favour of residential development.
Impact on building management and safety
Mixed-use schemes in the not-so-safekeeping of those with no prior experience will suffer from a lack of understanding and knowledge of the regulatory requirements for such management, whether in terms of planning, building safety or decarbonisation.
If the standards in management of a specific building drops, the commercial tenants may chose not to renew their leases. Furthermore, they might sue for poor management and so forcing fines or even imprisonment (especially in terms of building safety) on landlords.
Furthermore, the potential for disagreements in collective ownership of wholly residential buildings is well recognised. Throw into the mix commercial parts, and you have an even greater recipe for dispute. Many lenders are already reluctant to accept residential flats in mixed-use buildings as security. That problem will only be enhanced by an increased ratio of commercial to residential parts.
The Crown Estate’s work on Regent’s Street, Related Argent at King’s Cross, British Land at Canada Water, the Cadogan Estate on Sloane Street and Pavilion Road, and Grosvenor at Liverpool ONE are all examples of such projects, and which can only continue to thrive for the benefit of all through connected and professional ownership. The long-term effective management and stewardship of these areas will be thrown into jeopardy. Social vibrancy and eclecticism will be threatened as developers are forced to reset their parameters and their development criteria.
Conclusion
Clearly the impact of this proposal runs far deeper than the Government’s aim to make enfranchisement easier for groups of inexperienced leaseholders to take hold of our communities, leaving them stranded without the benefits of continuing and long term stewardship.
As the law currently stands the leaseholders do not have the choice whether to offer their landlord 999 year leasebacks of the commercial parts. The legislation proposes that the freeholders might be required to take such, and so giving the leaseholders a choice. One solution might be to oblige landlords to take 999 year leasebacks which will avoid disputes between leaseholders about whether to require the freeholder to take leasebacks. However, even where leasebacks are granted, the collective will take over the management and, as has been identified, will remain at large in management terms to the detriment of our high streets.
