Law Commission publishes leasehold reform proposals

Out-Law News | 24 Sep 2018 | 11:24 am | 3 min. read

Detailed proposals to reform the leasehold enfranchisement process and make it easier and cheaper for leaseholders in England and Wales to purchase the freehold of their house or flat have been published by the Law Commission.

The law reform body had been asked to publish proposals to reform the existing law by the UK government, which has committed to ending leasehold for the majority of new-build houses and reduce ground rents. It is consulting on the proposals until 20 November 2018, which it will then build into a final paper to be submitted to the government for consideration.

The paper builds on a pre-consultation paper published by the Law Commission in July, in which it set out its initial thinking on how to make the enfranchisement process easier and cheaper for owners of leasehold houses. The proposals in the detailed paper would apply to leaseholders of both houses and flats.

The Law Commission has proposed created a single, simplified procedure through which leaseholders of either a house or flat would be able to buy the freehold, or to extend their lease. It has also proposed removing the requirement that the leaseholder must have owned the lease for at least two years before beginning an enfranchisement claim. The paper also sets out options which the government could use to reduce the price payable by leaseholders to buy the freehold or extend their lease, although there is more of an emphasis on "providing sufficient compensation for landlords" than in the July paper.

Housing law expert Paul Pinder of Pinsent Masons, the law firm behind, said "The Law Commission has worked quickly to bring the detailed and balanced proposals to us in the housing sector. This was a challenging and bewildering area of law and I am sure that will continue, but the unified framework for both house and flat owners will be better as will the new right of estate enfranchisement now being added to the mix”.

Law commissioner Professor Nick Hopkins said: "Our proposals would make it easier and cheaper to buy the freehold or extend the lease of their home, ensuring the system works for ordinary homeowners across the country. We want to hear views from across the spectrum on how this complicated area of law can be improved.”

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 over time 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 cheaper purchase price for 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 arrangements 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.

Leasehold enfranchisement is the process by which most leaseholders can exercise the right to purchase the freehold of or acquire an extended lease on their property. However, the system has been widely criticised for its costs and complexity. Leasehold enfranchisement rights are the product of over 50 separate acts of parliament, and there are different rules for leaseholders of houses and flats.

The Law Commission said in its paper that its proposed single enfranchisement regime should guarantee compensation for freeholders that is "sufficient to justify the interference with the landlord's property rights". It has proposed two potential options for calculating this compensation: a single formula, which would not be based on market value; or options based on the current valuation methodology, with a premium based on market value but incorporating standardised rates. An online calculator could be provided which, depending on the method adopted, could "limit or even remove the need for expert assistance".

Paul Pinder said: “Ground rent investors, pension funds and house builders will see the Law Commission’s proposal to scrap or even to limit as fixed fees the recovery of their costs from leaseholders as adding further financial strain on their already low margin businesses in this niche subsector."

“These companies are a large source of funding for new housing developments and the government needs to find ways of getting to its target annual build of 300,000 new homes," he said. "Not being able to recover any of the landlord costs from the leaseholder as part of the enfranchisement process could be expensive for landlords if the process is widely adopted and promoted. The Law Commission has sought to balance this with some additional proposals limiting the types of challenge that can be made in enfranchisement claims and the requirement that all disputes that do arise be determined at one hearing before a single tribunal and this ought to reduce complexity and costs.”

The paper makes some recommendations specific to leaseholders of flats, including new 'collective' freehold acquisition rights and an end to the current requirement that leaseholders of both flats in a building containing only two homes must make an enfranchisement claim at the same time.