Law Commission publish their consultation on leasehold home ownership

Shortly before Christmas, the Law Commission announced its 13th programme of law reform. The Law Commission recognised that there’d been many criticisms aimed at residential leasehold law, including inconsistency, complexity and unfairness in the legislation governing enfranchisement.

Therefore, as part of its latest programme of law reform, the Law Commission announced that it would look at enfranchisement, and in particular look at ways to simplify the procedure and also to make valuation fairer and more transparent.

On 20th September 2018, the Law Commission published a consultation paper – Leasehold home ownership: buying your freehold or extending your lease.

The consultation paper itself stretches to over 540 pages, and  sets out comprehensive provisional proposals to reform the law relating to leasehold enfranchisement in England and Wales.

 

In summary

Although the consultation itself stretches to 546 pages, there is a helpful summary, available here.

In its consultation paper, the Law Commission have made provisional proposals for reform which are designed to provide a new scheme of qualifying criteria for enfranchisement rights, enhance and improve the enfranchisement rights themselves, and provide a new unified procedure for all claims.

The Law Commission are inviting views on their provisional proposals, which would:

  • make enfranchisement easy, quicker and more cost effective, (and thereby provide a better deal for leaseholders);

  • reform the existing rights of leaseholders (including removing the separate rules that currently exist for houses and flats); and

  • simplify (and reduce the legal and other costs of) the procedure for acquiring a freehold or an extended lease.

The proposals are set out in more detail below.

 

Key questions

The Law Commission’s project is a root-and-branch review of enfranchisement law, and asks four key questions:

  1. what should the enfranchisement rights be?

  2. who should be entitled to exercise enfranchisement rights?

  3. how should enfranchisement rights be exercised?

  4. what should it cost to enfranchise?

 

What should the enfranchisement rights be?

Currently, leaseholders who meet certain qualifying criteria have various enfranchisement rights. Leaseholders of houses can purchase the freehold of their house. Leaseholders of flats can purchase the freehold of their building, joining together with other leaseholders to make the purchase collectively.

Leaseholders of houses and flats who meet certain qualifying criteria have a right to a lease extension. Leaseholders of flats are entitled to a 90 year extension. There is no limit on the number of lease extensions that can be obtained.

Leaseholders of houses are also entitled to a lease extension, although very different terms apply.

The Law Commission propose a new, coherent and streamlined regime which no longer distinguishes between houses and flats, and instead gives:

  1. a universal right to a lease extension which is available to all leaseholders (the “right to a lease extension”);

  2. a right for leaseholders to acquire the freehold of a building individually, or of a building or estate collectively (“individual freehold acquisition” and “collective freehold acquisition”);

  3. a new right for leaseholders who did not participate in a previous collective freehold acquisition to do so at a later date (the “right to participate”).

 

Who should be entitled to exercise enfranchisement rights?

The current legislation sets out the various criteria that leaseholders must satisfy in order to qualify for enfranchisement rights. This can be complex.

In order to simplify matters, the following proposals have been made for reform.

  1. A single set of criteria (based around the new concept of a “residential unit” which can be applied to any leasehold premises, instead of the current approach which requires premises to be categorised as either a “house” or “flat”).

  2. The application this criteria in stages:

    • firstly to establish whether a lease extension is available to the leaseholder; and
    • if so, whether the leaseholder has the ability to acquire the freehold (either individually or collectively);
  3. The abolition of qualifying criteria based on financial limits;

  4. The removal of the requirement that he leaseholder must have owned the lease for the last two years.

 

How should enfranchisement rights be exercised?

Presently, an enfranchisement claim begins by a leaseholder (or group of leaseholders in the case of collective enfranchisement) giving the notice to the landlord. The landlord gives a notice in response, and the parties then negotiate the terms of the enfranchisement claim. The claim is completed by the grant of a lease extension or by the transfer of the freehold. Leaseholders are required to contribute to certain costs incurred by the landlord. So far as disputes are concerned, these are dealt with by either the county court or tribunal (or in some cases both).

Accordingly, the Law Commission propose to introduce a single procedure that would apply regardless of the enfranchisement right that’s being claimed. This would involve:

  1. standard forms which would make claims easier, simpler and cheaper to commence and respond to, and also reduce the risk of notices being invalid;

  2. an enfranchisement claim to be started by either the leaseholder serving the notice on their landlord or (where that’s not possible) by applying to the tribunal for an order allowing the claim to proceed in the absence of the landlord;

  3. a landlord’s notice to be accompanied by a draft contract (if any) as well as a draft transfer or lease;

  4. challenges to the validity of notices to be permitted only on a limited number of defined grounds;

  5. the tribunal to determine the leaseholders’ entitlement to bring a claim and the terms of acquisition, to include the terms of any contract, transfer or lease extension and a date for completion;

  6. either party to be able to apply to the tribunal for an order giving effect to the transaction if it’s not completed by the date agreed or set by the tribunal;

  7. the benefit of a leaseholder’s notice to be automatically assigned on any sale of the lease to a third party.

Additionally, the Law Commission also seek views as to whether leaseholders should be required to contribute to their landlord’s non-litigation costs. If that requirement is retained, a potential fixed costs regime is proposed.

 

What should it cost to enfranchise?

When a leaseholder exercises the right to enfranchise, the cost is comprised of two components:

  1. professional costs (e.g. fees of lawyers and valuers); and
  2. the “premium”, i.e. the price the leaseholder needs to pay the landlord for the extended lease or the freehold.

Calculating the premium is known as “valuation” as it involves putting a financial value on the interest being obtained by the leaseholder(s) from the landlord.

The terms of reference for the Law Commission’s project includes specific provisions in respect of premiums, and require the Law Commission, amongst other things, to set out the options for reducing the premium payable by existing and future leaseholders to enfranchise, and to produce options for a simpler, clearer and consistent valuation methodology.

In its proposals for reform, the Law Commission have suggested:

  1. the adoption of a simple formula. This moves away from attempting to identify a market value (which inevitably involves variables, and therefore uncertainties). The formulae identified are:

    • a percentage of the capital value of the property;
    • a ground rent multiplier, whereby the premium paid is a multiple of the ground rent;
  2. options based on current valuation methodology.

In their consultation paper, the Law Commission have included various worked examples, in simple terms, to show the effect on enfranchisement premiums of the different options for reform. Views are sought on the advantages and disadvantages, and practical workability of these different options.

 

Responding to the consultation paper

The consultation paper is available online at here:

The deadline for responses is 20 November 2018.

Comments can be sent to the Law Commission directly using their online response form.

Alternatively, comments can be sent via e-mail or by post to Leasehold Enfranchisement, Law Commission, 1st Floor, Tower, 52 Queen Anne’s Gate, London SW1H 9AG.

 

Leaseholder survey

The Law Commission website also includes a short survey which individual leaseholders are being invited to complete in order to share with the Law Commission their experiences of the enfranchisement process.

 

 

23 September 2018

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

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