The Leasehold and Freehold Reform reached the Statute Book at speed, having been first introduced in November last year and enacted in the pre-general election ‘wash-up’ in late May.
This article considers the impact of one significant change to the new legislation, namely the proposal to raise the 25% non-residential limit in collective enfranchisement claims to 50%. This change was welcomed by leaseholders. 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.
Indeed, 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 identified is the fragmentation of ownership of our high streets. It is important to note that many areas of historic value and importance have been successfully managed in single ownership for as long as they have existed.
Our high streets and town centres are dynamic and continually evolving, bringing social, economic and environmental benefits to communities. Exactly the sorts of things that the Department of Levelling Up, Housing and Communities is striving to achieve, so the Government has potentially defeated its own objectives by introducing this amendment.
As a result of the change, the ownership of mixed-use buildings on our high streets may now be fractured and diversified. Cohesive management of mixed use blocks may be undermined, resulting in a fall in standards of maintenance.
Impact on investment
This may then impact negatively on investment because the proposals will jeopardise capital investment and rental income from commercial premises.
Not only will property developers be disincentivised from investing in mixed-use buildings, but and 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 there is a necessary aim (supported by the government’s increasing lenient attitude to change of use through permitted development rights) to swing the balance in favour of residential development.
Impact on sustainable development
Investors are less likely to see it as beneficial to put capital into mixed-use buildings where the freehold is at risk and the proportion of commercial to residential adjusts to ringfence developments from enfranchisement, another unintended consequence may be a reduction of homes in sustainable locations.
A lack of investment will also impact on the creation and management of sustainable neighbourhoods, with the provision of subsidised housing through planning agreements with local authorities becoming at risk.
Impact on building management and safety
Mixed-use schemes in the not-so-safekeeping of those with no prior experience could suffer from a lack of understanding and knowledge of the regulatory requirements for such management, whether in terms of planning, building safety or decarbonisation.
The obligations of landlords are becoming increasingly onerous in terms of regulation, which amateur landlords are likely to struggle to keep up with, resulting in commercial tenants not wishing to renew their tenancies and so leaving commercial parts vacant. Commercial landlords are undoubtably best placed to comply with regulatory requirements and to efficiently manage the service charge regime which is critical to ensuring that vital works to repair and maintenance are carried out to a building. They are also often best placed to engage with insurers. And the buildings insurance market is a sophisticated arena which does not easily embrace the inexperienced.
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.
Impact on effective management and financing
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, threatening poor management and having potentially serious repercussions for the value of the building, and notably the residential parts. 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.
Lenders are already reluctant to lend for mixed use buildings, particularly the typical flat above a shop scenario, and are likely to be even more reluctant when the freehold is in the hands of inexperienced leaseholders rather than a commercial landlord. Lenders will be concerned about the risk of buildings falling into disrepair and the related threat to value arising out of unprofessional management. This could potentially create a two-tier market of flats in mixed-use buildings and those in wholly residential use, forcing down the values of flats in mixed use buildings.
In the hands of amateurs, the technical understanding, investment, experience and institutional knowledge of professional managers, which are critical to the high street - whether those that have existed for years or those that have emerged as a result of large regeneration projects - will founder.
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 could be thrown into jeopardy. Social vibrancy and eclecticism could be threatened as developers are forced to reset their parameters and their development criteria.
Small and independent businesses and enterprises may suffer without the opportunities afforded by the guardianship of professional developers looking to revive our high streets.
Professional developers working with local authorities to provide energy to communities may be forced to reconsider the opportunities. Just as the supply of affordable housing in town centre locations will be impacted, subsidised community shops such as butchers and greengrocers will no longer have the foothold afforded to them by such developers - because this is only achievable through common ownership and effective area management.
Impact on planning policy
Clearly this then impacts on the historical character of towns and cities, just at a time when investment was beginning to turn neglected high streets with empty shop units into thriving communities.
The current Government, through the National Planning Policy Framework, now requires "gentle density" in urban development. This too will be harder to achieve. Successful major regeneration proposals will be difficult to propel, and so the Government's stated aim of replicating King's Cross up and down the country will be more difficult to attain. Unlike professional landlords who have invested heavily in the high street, groups of leaseholders won't necessarily be interested in the big planning and environmental picture. They will have seized the opportunity to acquire the freehold because it simply looks good on paper. We are all familiar with the estate agent's mantra of "share of freeholder" but when this means sharing the ownership of a mixed-use building with all the liabilities that go with that, the mantra seems rather less appealing.
Conclusion
The impact of the Leasehold and Freehold Reform Act 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.
Katherine Simpson, Partner at Edwin Coe LLP
