Out-Law / Your Daily Need-To-Know

Enfranchisement plans for leasehold homeowners published

Out-Law News | 20 Jul 2018 | 5:01 pm | 2 min. read

Proposed changes to the law which would make it easier for leasehold homeowners in England to buy the freeholders of their properties have been published for consultation by the Law Commission.

However, proposed changes to the valuation formula used to calculate compensation for existing freeholders risk penalising one or other of the parties without further consideration, property law expert Paul Pinder of Pinsent Masons, the law firm behind Out-Law.com, has warned.

The proposals form part of a programme of work by the Law Commission on residential leasehold, enfranchisement and commonhold reform; and come ahead of a detailed consultation paper on enfranchisement, due for publication in September. The Commission also intends to publish consultation papers on reforming commonhold and the 'right to manage' before the end of the year.

Under the leasehold system, property owners own their homes for a fixed period of time, usually for many decades. The leaseholder pays an annual 'ground rent' to the freeholder of the property, which usually increases at a rate set by the freeholder. Leaseholds have traditionally been used for flats with shared spaces and on similar developments, with this status reflected in a discount on the purchase price of the property. However, of the 4.2 million private sector residential leasehold properties recorded in England in 2015/16, 1.4m were leasehold houses.

The government has announced its intention to ban almost all new leasehold arrangement for new-build houses as of 21 December 2017, although it is currently working with the property sector to develop exemptions to the policy. It also intends to take action on escalating ground rents, including by reducing them to zero on new long leases, as well as to work with the Law Commission to modernise the leasehold enfranchisement process.

In its forthcoming consultation paper, the Law Commission will propose a new regime for leasehold enfranchisement applicable to leaseholders of both houses and flats. Ahead of this, it has published a paper setting out its thinking on how to make the enfranchisement process easier and cheaper for owners of leasehold houses.

As part of this proposal, it is considering ways to reduce the price that leaseholders pay for the freehold. It is looking at two possible means of doing so: either by way of a simple formula, which is not based on the market value of the interest being acquired by the tenant; or an approach that more closely resembles the current regime, with a premium based on market value, but based on standardised rates and potentially removing the 'marriage value' element of the premium.

The paper also proposes removing the current requirement that the leaseholder must have owned the house for two years before becoming entitled to apply to purchase the freehold; potentially scrapping the requirement for leaseholders to contribute to the freeholder's legal costs; and making the enfranchisement process simpler to understand. The Law Commission is also proposing the introduction of an alternative right to purchase unlimited longer lease extensions without a ground rent.

However, Paul Pinder said that while the Law Commission appeared to be "meeting the terms of reference to streamline the whole enfranchisement process and to make it simpler for house owners to acquire their freeholds", it was not clear that its proposals would also provide sufficient compensation to landlords.

"To oversimplify the process to ten times the ground rent, as proposed by the paper, would appear to pay scant regard to the interests of landlords; yet the alternative proposal of a standard premium of 10% of the value of the property would over-compensate landlords in situations with 999-year leases with no ground rent review from the late 1800s or early 1900s," he said.

"Residents have purchased their properties and landlords have purchased their reversions based on the existing valuation system and the risks in that system. To radically overhaul the system and change the premiums to be paid would result in some form of detriment to one of the parties. Perhaps a better way forward would be for a transition period to apply pending full implementation - this, in my view, would seem fairer," he said.