The Government has recently reconfirmed its proposal to implement reforms around Lease extension and freehold enfranchisement in the current term of Parliament.
This follows the Government asking the Law Commission to review the law on enfranchisement with a view to making it simpler, easier, quicker and more cost effective and, controversially, to look at ways in which the price payable by leaseholders to acquire their freehold or a longer lease of their flat or house might be reduced.
The Law Commission consulted and published its recommendations Leasehold Home Ownership: Buying Your Freehold or Extending Your Lease.
The stated intention of the reforms is to “to help make our homes our own rather than someone else’s asset. They are intended to make the law work better for leaseholders”. The report is described as a ‘root and branch review of enfranchisement rights’.
The Law Commission subsequently published its options around how the premium might be recued. It has also consulted around and recommendations made with regard to the right to manage and reinvigorating Commonhold. Short summaries for each are available at the LawComm website.
The terms of reference for all three projects include the promotion of transparency and fairness in the residential leasehold sector and the provision of a better deal for leaseholders as consumers. Some 102 recommendations are made in the report.
This is part of a trilogy or articles in this regard.
So what reforms can we expect the Government to introduce further to the Law Commission’s recommendations around Buying Your Freehold or Extending Your Lease and what will it mean for leaseholders of flats and houses and their landlords?
Currently leaseholders of houses and flats enjoy different lease extension rights. The Commission sees no reason for this and so recommends a uniform right to lease extension at a peppercorn ground rent as often as leaseholders wish in return for payment of a premium.
The term is to be increased to 990 years instead of 50 years for a house or 90 years for a flat, the aim being to avoid the need for multiple lease extensions for those with second hand properties selling into a market where they are competing against owners of more recently constructed properties sold on 999 year leases.
Landlords are to retain the right to break the lease on redevelopment grounds, namely during the last 12 months of the original lease term or the last 5 years of each 90 year period from when the extended term commences to mimic the current arrangement so that leases in the same building are in line. Without that landlords would have been unable to obtain vacant possession of an entire building to redevelop it at that point and so regeneration would be impaired. This drives the term being 990 years as opposed to 999 years (so that the break rights in extensions under the old and new regimes coincide).
Leaseholders will only be able to extend their lease in respect of the premises and surrounding land (if any) that are in some way associated with their home to avoid unfairness to landlords where the existing lease included large external areas such as woodland or farmland.
While they recommend retaining the ability to make changes to the existing lease to correct defects or affect alterations or changes in the extent of the premises to be included in the new lease, they recommend that the parties no longer be able to agree whatever terms they wish so as to rein in the perceived inequality of bargaining power between landlords and leaseholders. There is more flexibility available where the new lease is only part of the leaseholder’s existing holding i.e., one flat out of a lease of an entire building.
The treatment of mortgages on a leaseholder’s title is to be made consistent by automatic transfer of those mortgages on to the title for the new lease with regard to houses as well, therefore avoiding the need for additional documentation to be executed on a house lease extension claim.
Rights benefitting a leaseholder such as a right of way over external land are to be included in the new lease whoever might have granted them originally and whether that was via the flat lease or separately so as to close off the problems that can ensue from the freehold reversion becoming fractured over time. So this removes a potential problem for leaseholders that they face currently.
Leaseholders will have the right to buy out their ground rent separately from extending their lease which will help those who have already extended, perhaps with a continued or increased ground rent or those holding a very long lease but with a significant ground rent to pay that is perhaps adversely affecting its ability to sell.
As regards those with onerous ground rents the Commission’s Valuation Report includes an option where capping applies to the treatment of ground rent for the purpose of calculating the enfranchisement premium. If that is followed by Government then it will increase the number of leaseholders who can afford to buy out their ground rent.
The Right of Individual Freehold Acquisition
A new right will enable leaseholders who hold all of the units in a given building the right to acquire their freehold. There might only be a single unit. This will primarily assist leaseholders of houses.
While the Commissioners rowed back on their provisional view that the leaseholder be able to acquire the freehold to everything let to them by their lease, they have gone the other way to assist leaseholders of houses whose ownership doesn’t extend to the entire building i.e. the roof might be excluded, to enable them to acquire their freehold where they can’t currently.
As regards any rights that the freehold currently benefits from or is subject to, the general rule will be for leaseholders to take the freehold on that basis without amendment so that for example they would receive the benefit of a private right of way over a neighbour’s property and they would take subject to restrictive covenants affecting it.
That said a leaseholder won’t take subject to rights that didn’t already affect them under their leasehold title; so that their burden cannot be increased in this regard. Leaseholders will take free of mortgages, beneficial interests under trusts of land and estate contracts and options. Personal obligations should in the main fall away. The exclusion being where the covenant is designed to support enforcement of positive covenants in an estate situation.
There will be strict control over the imposition of new property rights when the freehold is being acquired to protect leaseholders from obligations being imposed that are designed to generate a profit or provide an ongoing income stream for landlords. New rights will have to be capable of amounting to an easement under existing property law or a land obligation if introduced pursuant to the Commission’s recommendations in Making Land Work. They will only be permitted to the extent they replicate an existing right in the leaseholder’s lease.
Leaseholders will be able to claim rights replicating those granted whether landlord or third parties separately from their existing lease.
New personal obligations will not be permitted.
The Right of Collective Freehold Acquisition
This existing right for a number of leaseholders acting in concert to acquire the freehold to their building is to be amended.
Estate claims - Currently leaseholders are restricted to acquiring the freehold to a single self-contained building or part of it. It is recommended the right be expanded to enable them to acquire multiple buildings or parts of buildings in one claim i.e., several blocks of flats on the same estate, therefore benefitting from economies of scale and potentially avoiding problems around the acquisition of land that falls outside the relevant building.
Corporate nominee – the Commission has stepped back from recommending that a corporate body always be used as the nominee so as to give leaseholders more flexibility i.e., to proceed in their personal names in respect of smaller buildings. Likewise, while they recommend model constitutional documents for a corporate nominee their use isn’t to be made compulsory.
Acquiring the freehold to land outside the building – leaseholders are to continue to have the right to acquire the freehold interest in external land demised with their flat lease such as a garden. They are also to have the right to acquire land used exclusively by the owners and occupiers of those units. Where land isn’t used by them exclusively then they will need the landlord’s consent or Tribunal’s approval to acquire these areas.
Compulsory leasebacks – leaseholders are to be able to require their landlords to take leasebacks of units within the building that aren’t held by participants so making it easier for the participants to fund the purchase.
Enfranchisement tennis – to prevent claims taking place in quick succession the Commission recommends that after a successful claim there be a gap of two years before another can be made in effect.
Late joiners – the Commission is giving further thought as to how they can make it possible for late joiners to participate after the event as floated in the consultation in view of the significant number of complexities they have encountered trying to develop that proposal.
The aim is to increase eligibility for enfranchisement rights by liberalising some of the qualification criteria and removing obstacles to enfranchisement.
Non-residential use threshold strike out – currently leaseholders can’t enfranchise if more than 25% of their building is used for non-residential purposes. That threshold is recommended to be lifted to 50%. That is reflected in their recommendations about the right to manage.
Two year ownership requirement – this is to be dropped in respect of all enfranchisement rights and so flat owners who have recently acquired will be able to claim a new lease if this is implemented rather than waiting for that period. That said, in practice, it is common for the seller, if they themselves qualify, to commence the process and hand over the benefit of that to a buyer to see through so avoiding the need to wait.
Resident landlord exclusion – this is recommended to be removed.
Three or more flats rule – this is to be removed so bringing the building into qualification where one flat owner holds three or more flats i.e. where one company or individual holds all the flats in a building via a single lease which is more common than you might think.
House claim criteria – current criteria based on financial limits i.e., the low rent test and rateable values are proposed to be abolished on the basis that they are complex, outdated and make exercising these rights problematic and expensive for leaseholders.
The term “Residential unit” is to replace “houses” and “flats” as there is to be a single scheme for both now.
Flow chart – the steps under the consolidated scheme for enfranchisement are set out in the flow chart at figure 6 paragraph 6.393 of their report.
Right to participate – they are not able to introduce this yet and so enfranchising flat owners will continue to be entitled to leave out certain flat owners.
Two leaseholder building – both will still need to participate so one can hold the other to ransom unfortunately.
Business leases – a more accurate method of identifying the types of premises that should qualify for enfranchisement rights is to be introduced to clarify, for example, that live/work units are within the regime. This is reflected in the right to manage recommendations.
Qualifying Criteria: Exceptions to the Usual Rules
Shared ownership leaseholders who haven’t yet staircased to 100% will be able to extend their lease in the same way as full equity leaseholders while preserving the shared ownership nature of the lease. The premium payable is to consist of the usual cost of buying out any ground rent payable under the lease, but only a proportion of the landlord’s deferred reversionary interest in the property. Criteria for the exclusion of a shared ownership lease from freehold acquisition are to be set out.
National Trust – recommendations are designed to increase the availability of enfranchisement rights to leaseholders affected by the existing exemptions; negotiations with the National Trust has produced a system whereby leaseholders will enjoy the same right to a lease extension in return for the National Trust in respect of inalienable properties to have the right of first refusal at market value as and when the leaseholder seeks to dispose of it.
A new exclusion – community led housing developments are proposed to be exempt from enfranchisement claims.
Procedure – Making a Claim
There will be a single set of prescribed notices for the new single streamlined procedure. Room for “gaming” of the previous procedural rules is to be removed.
Leaseholders are to have the right to obtain information from the landlord before making a claim and to enforce that before the Tribunal with costs sanctions available where the leaseholder chooses to commence a claim despite the lack of landlord response.
Leaseholders will commence a claim by giving a claim notice to the “competent landlord”. They in turn will be responsible for notifying intermediate landlords of the claim so removing the possibility of a leaseholder’s claim being invalid for their failure to give notice themselves to such a landlord and decreasing their costs as a consequence.
Landlords won’t be able to get round a claim by denying receipt of it as, absent any landlord response, the leaseholder can apply to the Tribunal for determination of the claim in the landlord’s absence. For missing landlord situations the leaseholder can alternatively apply to the Tribunal in advance for permission to proceed with a claim without serving a claim notice. The Tribunal would need to be satisfied the leaseholder couldn’t identity the landlord or locate them.
Procedure – Responding to a Claim
Again, a prescribed form of notice must be used by the competent landlord. Certain supporting documents are required. The scope for challenge is to be limited.
As before the competent landlord will have at least two months to provide its Response Notice; it will be responsible for dealing with the claim and can compromise the position of other landlords subject to the right for them to make representations to the Tribunal or to take over the response to the claim by agreement or with the Tribunal’s permission.
The leaseholder’s claim notice proposals won’t bind the competent landlord if it fails to give its response notice in time. Instead the leaseholder must apply to the Tribunal for determination so there is no windfall for leaseholders in this situation and a corresponding incentive for landlords to embark on expensive satellite litigation around service of notices.
Leaseholders won’t suffer a deemed withdrawal where they fail to apply to the Tribunal to determine the claim within six months of the response notice as they do currently. Instead a landlord will be entitled to ask the Tribunal to strike out the claim notice on 14 days’ notice. The intent is to reduce the possibility of a claim being deemed withdrawn due to missing a procedural deadline while allowing stale claims to be struck out.
Completing a Claim
Service of a claim notice will no longer create a statutory contract. Instead the parties’ obligations will be those set out in the new scheme with the parties having the freedom to decide how they progress and the fall back to apply to the Tribunal as a “one stop shop” for resolving any disputes.
Sales with the benefit of a claim will be made easier by the automatic transmission of a claim with the lease on sale absent an express withholding of the transfer of the benefit (so reversing the current position). Buyers would have the right to disclaim the transfer of the benefit of a claim notice so they weren’t burdened with unwanted or defective claims. Claim notices will no longer need to be registered against the relevant landlord’s title to bind a new landlord. So another trap for the unwary falls away.
Mortgages – landlords will have to inform their lenders of a lease extension at least 21 days before completion and leaseholders will have to send a copy of the new lease to their lenders within a month of it.
Leaseholders are to be able to elect whether to merge their leasehold interest in the freehold they acquire on completion and where they do so rights benefiting/burdening the lease are to be automatically transferred up to the freehold title. Freeholders will not be prevented from transferring their interest by third party rights such as mortgages and beneficiaries under trusts of land; they will be deemed to consent to the transfer of the freehold or grant of the lease extension as appropriate.
Service of a claim notice is to suspend the operation of any agreements between the landlord and a third party which stand in the way of the relevant transfer or grant of lease.
The current division of responsibility for determining disputes between the county court and the Tribunal is to end with the Tribunal being responsible for all such matters. This will decrease the cost exposure for leaseholders as parties generally bear their own costs in a Tribunal claim.
Where a landlord fails to execute a lease or transfer the Tribunal is to have the power to do so in their place. If the completion monies have not been paid over then the Tribunal will have the power to set aside a previous determination and have the claim notice struck out or that the contract be discharged unless payment is made by a specified date. The Tribunal is to have access to the court funds office to take receipt of funds i.e. in missing landlord cases.
Valuation only disputes are to be dealt with by a single valuer member rather than a full hearing.
Leaseholder’s current obligation to reimburse their landlord for certain “non-litigation costs” is to be eliminated or controlled depending on the valuation methodology adopted by the Government as a consequence of the Commission’s Valuation Report. If the Government adopts a valuation methodology that is broadly market value based then the recommendation the Commission makes is that leaseholders shouldn’t be required to make any contribution towards such costs on the basis that the price agreed on the open market reflects the parties’ expectations that they bear their own costs.
It foresees only limited situations where the landlord should receive a contribution towards its costs; in low value claims (a floor is to be prescribed) a contribution towards costs is to be fixed with a cap on the total payable including the premium. A fixed sum is to be payable by leaseholders where the landlord has incurred additional costs as a result of an election made by them that has the effect of reducing the price payable i.e. requiring it to take leasebacks.
If the Government doesn’t adopt a valuation methodology that is broadly market value based then the recommendation is that leaseholders continue to contribute towards such costs, however a scale is to be set for this.
A system for security for costs is to be introduced. For repeated failed claims landlords will be able to apply to the Tribunal for an Enfranchisement Restraint Order against the relevant leaseholder which would then require them to obtain consent from the Tribunal before being able to bring a further enfranchisement claim.
Costs shifting – the Tribunal’s existing limited powers to order one party to pay the litigation costs of another is, subject to a few exceptions, to apply in relation to the expanded areas of dispute the Tribunal is to deal with; the Tribunal will be able to make such a costs order where a party is guilty of unreasonable conduct. The lease terms won’t fill the gap for landlords as these are to be unenforceable where they purport to allow the landlord to recover costs arising out of an enfranchisement claim.
Intermediate Leases and Other Leasehold Interests
The competent landlord is to owe a duty to other landlords to act in good faith and with reasonable skill and care. The other landlords are to have the right to apply for directions from the Tribunal about the conduct of or response to the claim. Those intermediate landlords will be required to provide all information and assistance to the competent landlord that is reasonably required and to contribute towards the non-litigation costs incurred by them dealing with the claim.
In a collective claim the nominee is to have the power to re-elect whether to require an intermediate lease as part of the enfranchisement claim.
For intermediate leases of residential units that make that leaseholder eligible to participate in a collective claim that leaseholder will have the power to decide whether their interest is acquired so that they don’t lose possession of the flat they live in for example.
Some intermediate leases include common parts i.e., a head lease of the building that includes vacant possession of the ground floor flat. They are prone to potentially losing possession of that flat as a consequence of the claimant’s right to acquire a lease of common parts. To meet that risk the Tribunal is to have the power to order that the lease be severed to allow acquisition of the common parts without possession of the flat going with it.
Some leases of common parts are granted for development i.e., an airspace lease. Under the current law they can be acquired as leases of common parts. It is recommended that the nominee purchaser have the right to elect whether to acquire such leases in their entirety or just that part containing the common parts so as to avoid having to pay out the development value in respect of the balance. The Commission comments, “These recommendations also reduce the incentive for landlords to grant such leases as a means of deterring enfranchisement claims”.
As regards the premium payable, a recommendation as such is not made but instead an option for the Government to potentially pursue given, being that when the premium is determined the existence of the intermediate lease be disregarded. Following a lease extension claim the rent payable by an intermediate landlord would be commuted on a pro rota basis so they weren’t left with a shortfall between rents received and those payable up the chain to their superior landlord.
Voluntary Transactions and Contracting Out
Voluntary lease extensions and individual freehold transfers are to be controlled to avoid leaseholders entering into transactions that are not consistent with the new statutory regime as it would undermine that and risk some leaseholders being persuaded to enter into such transactions on unreasonable terms as the Commission sees it. The collective acquisitions of the freehold will not be controlled in the same way as the risk to leaseholders is seen as being lower.
Individual lease extensions and freehold transfers would need to be blessed by the Tribunal as being objectively reasonable and fairly priced. Where the parties proceed without that blessing then the landlord would lose out as it may have accepted a reduced premium and return for a continued or increased ground rent for example, or shorter lease term but then find that this is ignored as the new lease would be deemed to have been granted on the statutory terms so for that ground rent and term instead. So there will be little incentive for parties to proceed outside the statutory scheme.
Likewise where a lease extension or transfer contains obligations that are inconsistent with the statutory scheme they would be unenforceable. If a voluntary lease extension omitted terms or the grant of rights that would have been included under the statutory scheme then the landlord would be obliged to add them in later or face liability for any losses suffered by the leaseholder as a result. So the landlord will have an incentive to require leaseholders to go through the statutory scheme for fear that they may otherwise omit a term from which such liability flows.
Exclusion of enfranchisement rights is to be prohibited i.e., a lease extension that includes a term restricting their ability to acquire the freehold in future. Any agreement to that effect would be void.
Conclusion: What does it mean for leaseholders and their landlords?
If the recommendations are implemented by Government then:
- Flat leaseholders already holding a long lease but that is subject to a ground rent, deemed “onerous”, will be pleased to have the right to buy out the ground rent and not compensate the landlord for the “onerous” element of it. That should offer a quicker solution to the alternative of claiming an extended lease and so reducing the ground rent to nil effectively via that route.
- House leaseholders will welcome a simplified procedure in particular the avoidance of problems around establishing the relevant rateable values.
- 990 years as a new term will assist leaseholders selling into a market where more modern properties were sold on leases of that length. Landlords will be relieved to see that their redevelopment break right remains, particularly where the majority of flats in a building have extended under the old regime so that the remaining few don’t stymie that prospect.
- Voluntary lease extensions may become a thing of the past as it will be safer for the landlord to require the leaseholder to go through the statutory process than to entertain granting this for fear that the voluntary lease doesn’t fully reflect the statutory terms, so leaving it with potential liability to the leaseholder.
That may be a problem for leaseholders in the process of selling as they will often only turn their mind to extending the lease at the point they agree a sale and then need to conclude that quickly, potentially tying it in with the completion of the sale. Buyers aren’t always relaxed about taking on the benefit of a lease extension claim as they then have the uncertainty as to what the premium and costs will be. So whether this is a problem for leaseholders will depend on how the Government deals with the valuation options the Commission has put to it earlier; if the premium is accurately predictable at the outset of a claim then on a sale it will be possible to agree a price to reflect that, particularly when there won’t be landlord’s costs to pay if the premium is set based on market value.
- Streamlining i.e., with regard to mortgages will help reduce leaseholder’s costs on enfranchisement.
- Landlord’s costs of dealing with a claim will be increased by the changes in the process such as needing to notify other landlords of the claim while their ability to recoup their costs will either disappear (if the premium is based on market value) or be reduced potentially (if non-market value). That may have an effect on the value of their interests although it will be small as compared to the effect of the valuation option implemented by the Government no doubt.
- The patching up of problem areas such as the grant of rights that benefit the existing lease is a boon for leaseholders, firstly as to fixing the problem itself and secondly reducing the costs they stand to incur in connection with the process.
- The right of individual freehold acquisition is new and will be a boon for those holding a number of residential units via a single lease wrapper i.e., a lease of a building. For example leaseholders of student accommodation potentially and registered providers who often hold entire buildings on a single lease.
- Leaseholders of houses currently precluded from enfranchising the freehold by the absence of ownership of part of the building such as the roof will welcome the extension of enfranchisement rights to them. Landlords will be disappointed in equal measure particularly where they have structured the lease to exclude the possibility of an enfranchisement claim, and perhaps accepted a reduced premium to reflect that.
- The extension of the collective enfranchisement right to multiple buildings will be helpful for estates where individual enfranchisement of buildings would have caused management problems and the like.
- The right to participate after the event is attractive in principle, particularly for the buyer of a flat in a building where their predecessors chose not to join in the acquisition of the freehold originally, however creating the ability for this may make it harder to obtain participation originally to get a claim off the ground and introduce the complexity the Commission is seeking to remove from the process so we question whether that will ultimately be introduced as a right.
- Allowing those with three flats or more in a building to count as a qualifying tenant will bring more buildings into qualification for the right to enfranchise and so will be welcomed by leaseholders.
- Increasing the threshold of non-residential use to 50% before a building is disqualified from enfranchisement is a boon for leaseholders but the arguments will remain as to the comparative for residential and non-residential areas at the margins.
- Removing the need for leaseholders to wait for two years before being able to make a lease extension claim is a boon for them but probably won’t solve the problem facing sellers with short leases described above. Messaging this change as an early stage will hopefully avoid unfairness to those who have sold recently.
- Shared ownership leaseholders will welcome the extension of the right to extend the lease of their home prior to staircasing to 100% equity.
- Leaseholders of the National Trust will welcome the extension of lease extension rights to them and no doubt accept the price of a right of first refusal in favour of the National Trust on sale.
- Community led housing developments exemption from freehold acquisition claims is designed to ensure the integrity of the same.
- A single procedure for flat and house claims should reduce costs to leaseholders. The ability to know more about the ownership of the building before commencing a claim will be helpful i.e., where the landlord has developed parts but it is unknown how many flats exist within them.
- Satellite litigation should reduce with the removal of deemed withdrawal for missing procedural deadlines that the leaseholder currently lives in fear of and the removal of the risk to landlords failing to give their counter notice on time that they are then fixed with the terms proposed by the leaseholder(s). That said, landlords may be less good at giving their response notice than they were as this fear has fallen away and so the Tribunal will have more work to do then determining the terms. Their only fear really is that the Tribunal may make an award below that they think they might otherwise have achieved if they had given a response notice and they will now lose the ability, save on very limited grounds to challenge that determination.
- Claims may lie dormant for much longer than they do under the current regime as the leaseholders won’t suffer an automatic termination of their claim; instead the onus will be on the landlord to apply to the Tribunal to strike it out which they may be reluctant to do in view of the cost of that. Claims may then be forgotten as they will no longer be required to be registered against the landlord’s title and so there is a risk of some confusion and perhaps litigation here depending on the fluctuation in values over time.