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The law of unintended consequences

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By David Stockley

In negotiation, there can be a tendency to view the deal as done when the principals have shaken hands. However, there is an elemental rule: beware the law of unintended consequences (“the law”).

In my field – advising landlords on voluntary and statutory extension of residential leases – the law looms large. A consequence of domestic incomes being squeezed, lending being tightened and people generally being more prudent is that “voluntary” deals to extend the lengths of long-term leases of flats has increased.

Such deals benefit landlords and leaseholders in significant ways as they remove the pressure and delay of the alternative dispute-based process, they can reduce the costs for both parties and they provide certainty of outcome early on.

There are also direct benefits arising from the nature of the deal and the inflexibility of legislation:

  • the landlord can retain a valuable interest in the building (a rising modern ground rent)

  • the leaseholder pays less for an extension than the “full value” statutory claim that requires a 90 year extension, no ground rent but a full capital premium.

Provisions relating to assured tenancies might apply to long leaseholds. A court faced with a tenant who has not paid his rent under an assured tenancy can be obliged to evict him. A long leaseholder with a non-assured tenancy is difficult to evict; accordingly, mortgaging his flat is not a problem.

This problem arises because the reduction in the capital the leaseholder pays for his new lease is offset by the landlord imposing a new modern ground rent. Ground rents are fine provided people take advice and understand they are a symptom of a lower price elsewhere. The unintended consequence of this barter is that the leaseholder’s rights in the property can vary markedly if the ground rent changes or even if the flat is his home.

Naturally, solicitors for leaseholders want to protect their client and solicitors for landlords want to get the deal done. What is proposed is often a compromise: e.g. the ground rent is reduced automatically to £1 below the point the lease is an assured tenancy. That looks like a quick and simple solution but beware the law: the unintended consequence of such a proposal is that the benefit the landlord has (a guaranteed rising income stream in return for receiving less capital) is lost.

If you are a landlord or leaseholder and would like to speak to our enfranchisement team, we would be delighted to discuss your requirements.

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