Lease Extensions and Collective Enfranchisement – Will Leasehold Reform make them cheaper?Mark Sadler
On 19th July 2018 the Law Commission announced outline proposals to improve the enfranchisement process for leaseholders of houses.
It claims that the current regime is complex, expensive, arbitrary and encourages an unhelpful tactical approach to negotiations.
Its proposals to improve the enfranchisement process for leaseholders of houses include:
- Introducing a single coherent set of criteria for enfranchisement that would apply to both houses and flats and abolishing qualification criteria based on financial limits (such as rateable values).Allowing leaseholders on an estate comprising multiple buildings to collectively purchase the freehold of the estate.
- Removing the requirement that leaseholders must have owned the lease for two years before making a claim and allowing leaseholders to extend their lease by a longer term an unlimited number of times.
- The proposals also include various options for changing the valuation formula, with the aim of reducing premiums for leaseholders and increasing transparency.
- Introducing an alternative right to purchase unlimited longer lease extensions without a ground rent – of (say) 125 or 250 years.
- Making the enfranchisement procedure simpler to understand, to minimise disputes and prevent leaseholders falling into legal traps
- Removing the requirement that leaseholders must have owned the lease of their house for two years before making a claim
- Potentially scrapping whether leaseholders should contribute to their landlord’s legal costs, and if not, capping the contribution at a fixed maximum amount
- They are intending to simplify and accelerate the enfranchisement process, for example by ensuring that all disputes are dealt with by the First-tier Tribunal.
It is clear that these changes will also eventually apply to flats and buying the freehold of such flats through the collective enfranchisement regime.
By September 2018, the Law Commission hopes to publish its full paper on enfranchisement, which will contain proposals relating to both flats and houses and will be subject to a public consultation.
On the face of it this is good news for tenants (long leaseholders and owners of flats) but bad news for landlords (often the freeholders).
The options for reducing the price that leaseholders pay to the landlord catches the eye and will of course be of interest to both flat owners and freeholders.
The Law Commission is looking at various options such as by changing the formula used to calculate the cost of buying the freehold or extending the lease, following the Government’s request to set out ways that the price could be reduced. The Guardian has already quoted anything from 10 x ground rent and or “10% of the value of the property” – obviously a simple formula like this will be easy to understand. This would however essentially halve the value of such assets which are commonly traded at auction for around 20 x ground rent.
As an alternative the Law Commission are also looking at using the existing lease extension system but standardising it to remove a complicated element called “marriage value”.
There is obviously going to be a strong landlord lobby against any changes to the calculations of lease extensions from their current form for existing leases. The Duke of Westminster is often quoted here but perhaps more pursuasive will be the lobbly from the large number of mid-size and small investors and a good number of pension funds and insurance companies for example Avivia. The bullish Landlord will expect the government to keep the status quo to some degree but there must be some softening probably in the form of restricted costs/valuation fees to be paid to the Landlord.
The Law Commission said it would have to ensure that “sufficient compensation” was paid to landlords. “Any changes to the law that government takes forward will have to comply with human rights legislation and take account of the impact of reform”.
“And while some changes – in particular the options that we have been asked to present to reduce the premium payable by leaseholders – will inevitably benefit leaseholders at the expense of landlords, that is not the case across the board.”
What do we do now?
The position for both landlord and particulally tenants is wait and see. It is sensible that if a tenant is thinking about extending their lease they should consider deferring if they can (provided their lease is not 81 years are counting) to see more detail on the outcome of these proposals in the coming months.