Law Commission’s proposed changes of leasehold enfranchisement

On 21 July 2020, the Law Commission published three reports on commonhold; leasehold enfranchisement/freehold acquisition and the Right to Manage (RTM). There is a large amount of information to digest for those involved in the residential leasehold sector. The trio of reports are long, with hundreds of recommendations. This article will focus on the leasehold enfranchisement report.

Read a summary of all three reports and the Law Commission’s recommendations

Leasehold enfranchisement

The Leasehold Reform Act 1967 provided leasehold tenants with the right to buy the freehold of their property, either with the agreement of the landlord or without (enfranchisement). The Commonhold and Leasehold Reform Act 2002 took steps to simplify the rules relating to qualifying for enfranchisement and also provided leaseholders with extra rights. However, the current legislation has been criticised as being complex, inconsistent and costly. The Law Commission’s recommendations are designed to reform enfranchisement rights to the lasting benefit of leaseholders to further streamline and simplify the law to include:

Enfranchisement rights

• The right of leaseholders of both houses and flats to be entitled to a lease extension for a term of 990 (increased from 50 and 90 years respectively).
  • The leasehold extension will be provided at a peppercorn ground rent and on payment of a premium.
  • Terms of the new lease should continue to be based on the existing lease with the ability to request suitable variations.
• The option for leaseholders with a very long unexpired term to “buy out” the ground rent without also having to extend their current lease.
• The right of individual freehold acquisition, giving a leaseholder who owns all the units in a property (or the only unit) the right to acquire the freehold. This will primarily apply to leaseholders of houses.
• The right of collective freehold acquisition, allowing multiple leaseholders to join together to purchase the freehold of their building through a nominee purchaser, which must be a corporate body with limited liability.
  • Allow leaseholders to require landlords to take “leaseback” of units within a building which are not let to leaseholders participating in the claim.
  • Leaseholders to be permitted to acquire multiple buildings using one claim form and one nominated purchaser to streamline the process.
• For both individual and collective freehold acquisition, leaseholders should acquire the freehold subject to and with the benefit of all existing property rights at the point the claim is made. This will ensure that the leaseholder is protected against the imposition of onerous or unreasonable obligations on acquisition of the freehold title.

Qualifying criteria

• Qualifying criteria should be based upon the concept of a “residential unit” to remove the differentiation between “houses” and “flats”. Accordingly, wherever possible, recommendations will apply uniformly irrespective of whether a property is a house or a flat.
• A leaseholder should have a lease that was granted for more than 21 years.
• The requirement for leaseholders to have owned their leases for two years before exercising enfranchisement right to be removed.
• The resident landlord exception to be removed.
• The qualifying criteria based upon financial limits and rateable values to be removed.
• In relation to collective enfranchisement: —
  • The leaseholders of at least half of the total number of residential units must participate. Where buildings contain only two leaseholders, both must participate.
  • The upper limit of non-residential space to be increased from 25% to 50%. (The same upper limit of 50% non-residential space with also apply when a leaseholder intends to acquire the freehold of a house.)
  • Removal of the three-or-more flats exception.

How enfranchisement rights will be exercised

• The various procedures for bringing an enfranchisement claim will be replaced with one streamlined procedure using a single set of prescribed forms.
• New rules to be introduced in relation to deemed service.
• All enfranchisement disputes and issues to be decided by the Tribunal.
• Removal of the procedural traps that allow claims to fail and can give landlords an unfair procedural advantage, such as automatic withdrawal provisions.
• Current requirement for the leaseholders to pay the landlords’ non-litigation costs to be eliminated or controlled, depending on the valuation option adopted.

Read the full report on leasehold enfranchisement.

Options to reduce the price payable

The Law Commission has also produced a report relating to valuation in enfranchisement and have put forward three alternative schemes for determining the premium payable. The schemes consider whether “marriage value” or “hope value” should be payable. The different proposals are not considered further in this article, more information can be found in the Law Commission’s report on options to reduce the price payable. It is recommended that this is dealt with by an appropriate valuer as this is not something a lawyer can express a view on.

What next?

The clear aims of the recommendations are to make enfranchisement more accessible and the procedure more streamlined in order to limit costs. The recommendations in relation to enfranchisement will need to be considered alongside the proposals in relation to commonhold and RTM regimes. In any event, it is clear that there will be substantial reform to leasehold ownership and the Government will have a huge legislative task ahead should the Law Commission’s recommendations be adopted.