In recent years, there has been growing criticism over the leasehold type of ownership and certain specific aspects of how the leasehold market operates. The concerns have been raised, particularly, about the high and escalating ground rents, excessive service charges, the landlord’s right to terminate a lease if the leaseholder remains in breach of its terms, or houses being sold on a leasehold, as opposed to freehold basis, for no apparent reason other than for developers to extract a profit from owning the freehold. Additionally, the leasehold, in comparison with the freehold, is often seen as a wasting asset due to the fact that it is time-limited, i.e. the less time is left on the lease, the less valuable the property becomes and the more expensive the lease extension would be.
In an attempt to address these issues, on 21 July 2020 the Law Commission published a report on leasehold enfranchisement “Leasehold Home Ownership: Buying your Freehold or Extending Your Lease”.
Leasehold enfranchisement, in simple terms, is the right for people who own the residential property on a long lease to buy the freehold or extend their lease. A long lease is a lease which had an original term of over 21 years when it was first granted.
At present, the leaseholders of flats have the right to extend their lease, once they have owned it for at least two years, for another 90 years at a ‘peppercorn rent’ (a peppercorn rent means that no ground rent is paid). The landlord is entitled to a premium (the price) for extending the lease, and this is based on a formula set out in the Leasehold Reform Housing and Urban Development Act 1993, as amended by any future Acts that apply. The enfranchisement process is initiated by serving the leaseholder’s notice (section 42 notice) on the landlord with the proposed price for the lease extension (the price is usually calculated and advised by the leaseholder’s instructed surveyor). The landlord would then serve a counter-notice with a counter-proposal. In the event that both parties are not able to agree the premium, the matter will be determined in the First-tier Property Tribunal. As can be already seen through this very brief and simplified summary, the enfranchisement process is not very straightforward. It has a number of potential legal pitfalls to be wary of, therefore, seeking a legal advice is strongly recommended.
The major change proposed by the Law Commission is that leaseholders of both flats and houses should have a new right to a lease extension for a term of 990 years, in place of current, shorter extensions of 90 or 50 years respectively. The leaseholders should also be able to enfranchise immediately after acquiring their lease rather than having to wait two years as they do now. There would be no ground rent under the extended lease and landlords would not be able to use the lease extension process to impose new, onerous obligations. These recommendations, if implemented, mean that the vast majority of the property’s value would be placed back in the hands of the leaseholder, preventing the need for further extensions and providing homeowners with the increased security.
The proposals also aim to expand the scope of enfranchisement by allowing flat owners to buy together the freehold of premises where up to 50% of the building is commercial space rather than the current limit of 25%.
Finally, the Law Commission brought attention to the current legislation covering leasehold enfranchisement calling it very complex, inconsistent and costly for the leaseholder. The Law Commission suggested that the various procedures for making enfranchisement claims should be replaced with a single procedure and simplified in order to remove the legal traps which cause claims to fail and which enable unfair procedural or tactical advantages for landlords with experience of the system. In addition, the current requirement for leaseholders to pay their landlord’s costs of dealing with a claim should be eliminated or controlled.
For those leaseholders who are thinking of extending their leases or buying a freehold of their premises, it is important to be aware of these proposed reforms when considering initiating the enfranchisement process. For those who still have a safe margin of years to run on their leases, it might be sensible to wait for the government’s reaction. However, at present it remains uncertain when, and if at all, these reforms will be implemented.
If you are considering extending your lease or buying a freehold of your premises and wish to understand your options, or you have any other Landlord and Tenant enquiries, please contact our Property Team for assistance.
The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.
© Miller Rosenfalck LLP, October 2020