Landlords beware: Shared ownership changes and the problem with enlargement
Shared ownership leaseholders will be given the right to extend their leases by 990 years at zero ground rent as part of the leasehold reforms that the Government has announced under the Leasehold Reform (Ground Rent) Bill. The new model shared ownership lease requires any new leases be granted with a minimum 990 year term.
As a result, many property developers will now require the grant of a 999 year lease, as opposed to the 125/250 year leases typically seen in the market until now.
In this context, it is useful to note the risk of "enlargement" provisions. In short, this is where a leaseholder can exercise a right to a freehold interest in the same land.
Enlargement can occur where a lease has a term of at least 300 years. Given the longer leases now required by developers in order to satisfy the shared ownership requirements, enlargement is an issue landowner need to be aware of and work around in order to preserve the value of a freehold reversion.
Under section 153 of the Law of Property Act 1925 (section 153), in order to satisfy enlargement, a lease needs to meet the following criteria:
- the lease was originally granted for a term of 300 years or more and has at least 200 years left to run;
- the ground rent is a peppercorn or has no monetary value; and
- the lease does not contain a forfeiture clause permitting the landlord to re-enter in the event of a breach of a tenant covenant.
Subject to those requirements being met, the leaseholder may proceed to apply to enlarge their lease by executing a deed of enlargement. It is important to note that the enlargement process undertaken by a leaseholder does not require the leaseholder to consult with the landlord in advance or obtain prior written consent from the landlord. In addition, enlargement provisions cannot be contracted out of in a lease.
Landlords wishing to protect their freehold interest should consider steps to take the lease outside the ambit of section 153, including reserving a sufficient annual rent or including forfeiture provisions.
In practice there may be difficulties with the introduction of measures such as these. For example, will developers agree to include forfeiture in a 999 year lease (which they have paid a valuable premium for) for a breach of covenant relating to decoration? Will the inclusion of a ground rent in such a long lease affect their borrowing ability?
With longer lease terms to accommodate shared ownership requirements set to become the new market standard, these matters will need to be met head on. With the right guidance, they can be navigated to ensure the right outcome for all involved.