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Law Commission lays the foundations for leasehold reform of houses

Lease agreement Print publication

31/07/2018

The Law Commission has released its paper on leasehold enfranchisement of houses and their proposed solutions to address the current concerns. Walker Morris summaries the salient points of the paper.

Leaseholders of houses have a right under the Leasehold Reform Act 1967 to purchase either an extended lease of their house or purchase the freehold of their property. It is widely argued that there is no need (other than for the financial gain of the freeholder) for a house to be sold on a leasehold rather than freehold basis. Indeed the government has announced its intention to prohibit the sale of leasehold houses [1]. The 1967 regime is criticised for being uncertain, lengthy, costly and complex.

The Government asked the Law Commission to prioritise solutions for existing leaseholders of houses and to set out solutions before summer recess 2018. The Government identified objectives of enfranchisement reform. The paper produced is not the Law Commission’s final recommendations for reform nor is it an invitation to comment. Instead it provides provisional proposals for enfranchisement reform on 4 key issues, (1) what should the enfranchisement rights be; (2) who should be entitled to exercise enfranchisement rights; (3) how should enfranchisement rights be exercised; and (4) what should it cost to enfranchise.

What should the enfranchisement rights be?

The Law Commission has suggested that a longer lease extension of either 125 or 150 years with no ground rent payable will be proposed (50 years under the current regime with a modern ground rent). In addition leaseholders whose properties are situated on an estate comprising multiple buildings (whether those buildings are houses, flats or a mixture of the two) will be able to come together to collectively purchase the freehold of the estate.

Who is entitled to exercise enfranchisement rights?

The paper proposes to simplify the law by replacing the distinction between house and flat (which currently trigger different statutory regimes) with a single set of criteria based on the concept of “residential unit”. The paper also suggests the (much welcomed) abolition of the low rent test.

The paper also confirms the intent to remove the requirement that the leaseholder must have owned their house for a period of 2 years before a claim for enfranchisement can be made.

How should enfranchisement rights be exercised?

The paper again refers to a single set of criteria based on the residential unit for both houses and flats. It suggests that leaseholders will be provided with specific categories of addresses for service of their statutory notices on their landlords. Service will be deemed to occur if it is affected at one of these addresses. Landlords will be required to provide their draft transfer with their response or counter notice (something which is often done in practice).

The paper also confirms that all enfranchisement disputes will be dealt with by the Tribunal (rather than either the Tribunal or County Court) moving forwards.

What should it cost to enfranchise?

The Law Commission has confirmed that it will be consulting on whether leaseholders should have to pay legal and surveyor’s costs of the freeholder and whether, if such provision is retained, whether a fixed costs regime should be introduced.

With regards to the premium calculation, it is widely acknowledged that the current calculation is complicated and the calculation methodology both circular and artificial.

The Law Commission puts forward two categories into which options for premium reductions fall:

  1. a simple formula for all leaseholders; and
  2. options based on the current approach

Option 1 contains a number of different options. It sees the Law Commission moot enfranchisement premiums being set by reference to a simple formula with prescribed figures. This will be unpopular with landlords as it bears no reality to the value of the asset. A variation of this option is to set the enfranchisement premium by reference to a ground rent multiplier. Again, however, the result would bear no relation to the value of the landlord’s asset. Consideration is sensibly given to using this method where there is little or no reversionary value in the landlord’s asset (where the remaining lease terms are particularly long)[2]. The Law Commission also discusses whether premiums can be set by reference to a percentage of the capital value of the freehold.

Again there are several different options within option 2. The first is to limit the premium to value of the term and reversion only i.e. remove any marriage value calculation for leases whose remaining terms have fallen below the 80 year mark. This method, without further consideration, would however increase the premiums paid by the leaseholders of some houses. The Law Commission also considers retaining the current valuation methodology but reforming the valuation components (for example by prescribing rates at particular levels) to make the calculation simpler (thereby reducing surveyor’s fees) and the premiums payable smaller.

The Law Commission will publish a formal consultation paper in September 2018 and invite comments on each of the proposed valuation approaches and the way in which they will affect both leaseholders and freeholders.

WM Comment

The paper will be welcome by the clamour of leaseholders, MPs and other interested parties involved in the current leasehold furore. It is, understandably, likely to cause freeholders some concern given the potential amends to the current regime, particularly in relation to the premiums payable.

The paper makes it clear that there will be significant overlap between the proposals for the enfranchisement of flats as well as houses. It is therefore safe to assume that some of the proposals contained in this paper will be regurgitated in relation to proposals for reform of leasehold flats.

Overall there is potential for sensible reform of the current legislative regime. There are however some suggestions which, although they would simplify the process, would leave freeholders considerably out of pocket and receiving premiums which bear no resemblance to the value of their assets.

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[1] https://www.gov.uk/government/consultations/tackling-unfair-practices-in-the-leasehold-market, https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2018/04/PUBLISHED-Residential-leasehold-terms-of-reference-180418.pdf
[2] Based on the Long Leases (Scotland) Act 2012

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