All change in residential leasehold: the Consultation: Are we moving towards significant reforms in this area?

Mark Chick is Partner and Head of the Landlord & Tenant team at Bishop & Sewell, Mark is recognised as a leading UK authority in this sector. He is a director and a founder committee member of the Association of Leasehold Enfranchisement Practitioners (ALEP) the sector body to which all reputable valuers and solicitors working in the field of Leasehold Reform now belong.

All change in residential leasehold: the Consultation: Are we moving towards significant reforms in this area?

On 20th September the Law Commission published its much awaited consultation paper on its proposed reforms to enfranchisement legislation.

Entitled ‘Leasehold home ownership: buying your freehold or extending your lease’ the document runs to 564 pages and asks views on 135 questions relating to the proposed changes some of which are quite radical.

A copy of the Consultation can be found here.

Who are the Law Commission and what are they doing?

The Law Commission are a publicly funded but independent government body that are set up to review the law and make recommendations for change.

In the Law Commission’s 13th Programme of Law Reform they have chosen to look at the law relating to leasehold and residential property, and as part of this the law on enfranchisement.

Why look into enfranchisement?

The law relating to this area is complicated and results from a number of Acts of Parliament that have amended the originating legislation. By way of example there are at least 50 Acts that have amended the Leasehold Reform Act 1967 alone over the last 50 years. The other main statutes are the Leasehold Reform Housing and Urban Development Act 1993 and the Commonhold and Leasehold Reform Act 2002. Both of these have also seen significant amendments.

To the flat owner looking to extend their lease or purchase their freehold the process is not straightforward and there are differing regimes for flats and houses; and this is to say nothing of the basis on which the price (or premium) that you will pay to exercise these rights is calculated.

So, why is there all this fuss about this Consultation?

The Government has been aware of the issues building in the leasehold sector for some time. Notably the issues arising out of the so-called ‘leasehold scandal’ and the sale of leasehold houses in the North West (predominantly) by developers who reserved ground rents that rise aggressively, for instance doubling every ten years on a compounded basis.

Numerous pressure groups have been vocal about this area, not least of which is the Leasehold Knowledge Partnership, who have successfully lobbied in Parliament through the creation of an All Party Parliamentary Group on Leasehold matters.

Last year the Government published a consultation paper ‘Tackling Unfair Practices in the Leasehold Market,’ one of the outcomes of which was a recommendation that the Law Commission look at possible changes in this area, notably to address the issues around leasehold houses, but also to look at reform more generally and the issue of Commonhold.

What does the Consultation mean?

It means (at the moment) that the Law Commission are looking for views on their proposed changes to the law in this area, and the consultation closes on 20th November 2018. Anyone interested should review this lengthy document and make their views felt.

What are the proposed changes and are they radical?

As might be expected there are a lot of reforms based on the detail but a summary of the key areas are as follows:

  • A single unified right of enfranchisement – this is the biggest simplifying and ‘reforming’ change – seeking to bring together the currently separate regimes for flats and houses – instead there will be enfranchisement rights that attach to ‘residential units’ – in other words, no need to debate at length whether a property is a house or not.
  • The right to buy the freehold to a leasehold house even if the lease is not a ‘fully repairing’ lease of the whole – thereby creating an ‘individual right of enfranchisement’ for a house.
  • An individual house owner to have a choice as to whether to opt to extend the lease, or to buy the freehold on a standalone basis.
  • The term of the statutory lease extension to be 125 or 250 years (possibly longer).
  • An end to the two year qualifying period of ownership prior to making a lease extension claim.
  • The right to ‘buy into’ a freehold collective claim after it has completed – subject to payment of a fair price and costs.
  • In a collective freehold purchase the right for the flat owners to mandate that the freeholder takes leasebacks of non-participating flats and or un-let units so that the overall enfranchisement price is reduced.
  • A house owner seeking a lease extension is to be able to obtain 125 or 250 years at a nil ground rent in exchange for a premium – in other words no more 50 year extensions of houses with lower rateable values that qualify under the 1967 Act. The existing right is limited and criticised as it leaves the house owner with a modern (and much higher) ground rent as there is no premium to extend in these cases. The right is also little used in practice.
  • A right of ‘estate enfranchisement’ so that houses on an estate can collectively buy the freehold subject to a qualifying number acting together.
  • Reform to the valuation calculation so that either a simple multiplier is to be applied to ‘straightforward’ cases, or so that a government prescribed calculator would determine the outcome in these cases.
  • The possibility of there being set rates for capitalisation rate, deferment rate and relativity, thereby making the calculation ‘easier.’
  • Measures to control the costs that can be recovered by landlords – either (controversially) by making each side pay their own costs for all parts of the process, or by setting a cap or ‘scale fees’ for ‘recoverable’ work.
  • An end to the separate jurisdiction of the County Court in determining disputes over notices, instead these are to be determined by the First tier Tribunal.
  • A simplification of the notice serving process. There is to be one prescribed form for all enfranchisement rights with guidance on the addresses that can be served, to avoid debate about this.
  • The process to be ‘front loaded’ so that most debate about the transfer terms and or lease terms takes place at the start of the process to ‘avoid’ the need for lengthy argument later on.
  • The parties to be able to correct the position in their notice or counter notice by serving a further notice amending their position at any time before the matter has been determined by the Tribunal

What happens next?

Once the consultation closes the Law Commission will review the responses and then work on its paper recommending reform of the law in this area. This is not likely to be finished until the end of 2019.

Once Parliament has this report it is for the politicians to decide whether to act on these recommendations for change. However, the Law Commission will not generally look at an area without an assurance from the government that it seriously wants to consider reforming the law in that area. There is a good chance therefore that some or all of the suggestions listed above will come into force, one way, or another.

So, if the law changes, when will this be?

Based on the above, the earliest that the Commission’s paper will be ready is during 2019 and very probably towards the end of that year.

Assuming that Government then decides to act on the recommendations, this would mean that the earliest that draft legislation could be proposed will be 2020. Even then, the fact that the Commission has consulted and reported does not mean that the changes will come into effect as proposed.

Experience shows that there have been a lot of very well thought through reports and recommendations to parliament from the Law Commission, not all of which have been acted upon.

Accordingly, there are no guarantees of change. Changing the law is a political business and certainly requires parliamentary time. In the next year to eighteen months, Parliament is going to have a number of other projects to deal with in the shape of Brexit, which may blow some or all of this off course.

That being said, the Consultation represents a real and exciting opportunity for change of the law in this area and I would urge anyone with an interest in this area to read the Consultation and to make comments in response to the questions that have been asked.

Reviewed: July 2019