Law Commission consultation on leasehold enfranchisement reform

13th December 2018

The Law Commission has undertaken a “root and branch review” of all aspects of enfranchisement law and is consulting on detailed and wide-ranging proposals for reform. Housing Management & Litigation experts Karl Anders summarises some of the headline proposals and urge stakeholders to have their say before the extended consultation closing date of 7 January 2019.

Wide-ranging proposals for reform

We explained in our earlier briefing the Law Commission’s paper on leasehold enfranchisement of houses and its anticipated proposed solutions to address current concerns that the existing regime [1] is too uncertain, costly, lengthy and complex.

The Commission’s proposals, which have now been confirmed in a formal consultation, are extensive. They address, in detail, what enfranchisement rights should be; who should be entitled to exercise them and how; and how much enfranchisement should cost.

A selection of the headline proposals are summarised below.

What should enfranchisement rights be?

In summary, the Commission proposes:

• a universal right to a lease extension which is available to all leaseholders, whether they own a house or flat, with the resulting extended lease being at a nominal ground rent;
• a right for leaseholders to acquire the freehold of a building individually, or of a building or estate collectively (“individual freehold acquisition” and “collective freehold acquisition” respectively); and
• a new right for leaseholders who did not participate in a previous collective freehold acquisition to do so at a later date (the “right to participate”)

with all existing enfranchisement rights being retained, but in a streamlined form and which are on more favourable terms than under the current law.

(To remove scope for unfavourable terms to be added during the enfranchisement process it is also proposed that an extended lease would be on the same terms as the existing lease, except where either party elects to adopt non-contentious modernised terms drawn from a prescribed list.)

Who should be entitled to exercise enfranchisement rights?

In summary, the Commission proposes:

• a single set of criteria based around the new concept of a “residential unit”, which can be applied to any leasehold premises to overcome existing difficulties in determining whether a building is a house [2];
• the abolition of qualifying criteria based on financial limits;
• the extension of the 25% limit on non-residential use (which currently applies only to collective freehold acquisition claims) to all freehold acquisition claims;
• the removal of the requirement (currently applicable to all lease extension claims, and claims to acquire the freehold of a house) that the leaseholder must have owned the lease for at least two years;
• in collective freehold acquisition claims: (a) the removal of the requirement, where a building contains only two flats, for the leaseholders of both flats to participate in the claim; and (b) the abolition of the provision that where a leaseholder holds a long lease (or leases) of three or more flats in a building, they are not a qualifying long leaseholder in respect of those flats.

How should enfranchisement rights be exercised?

The Commission proposes a single, streamlined and standardised procedure that would apply regardless of the enfranchisement right being claimed; and that all disputes should be dealt with by the Tribunal [3] so that leaseholders would no longer have to navigate the complex division of responsibility between the Court and the Tribunal [4]. The Commission also outlines a potential fixed-costs regime.

What should it cost?

The Commission sets out proposals for cost reform which are divided into two categories:

• the adoption of a simple formula to move away from attempting to identify a market value (which inevitably involves variables, uncertainties, and associated professional fees). Two possible formulae are identified: (a) a ground rent multiplier, whereby the premium paid is a multiple of the ground rent; and (b) a percentage of the capital value of the property; and
• options based on current valuation methodology, but with components combined in such a way as to prescribe rates in a way that is favourable to leaseholders.

The Commission is also considering how an online calculator could be used to support valuation.

Next steps

The consultation is open until the extended deadline of 7 January 2019.  The Law Society Gazette reported at the end of November that the Commission has received one of its biggest postbags of responses, as this is clearly a sensitive and topical issue.  Despite leasehold reform generally being high on the Government’s agenda; leaseholders’ desire for action on enfranchisement as soon as possible; and also the Commission working to what it has described as an accelerated timetable, it is unlikely that the consultation and parliamentary process will be completed in time to see a Leasehold Reform Act 2019. The Commission is, however, due to publish a final report next year, and Walker Morris will continue to monitor and report on developments.

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[1] pursuant to the Leasehold Reform Act 1967
[2] with the application of these criteria in two logical stages to identify the enfranchisement rights available to any particular leaseholder (a) first, to establish whether a lease extension is available to the leaseholder in question; and (b) if so, to establish whether the leaseholder has the additional ability to acquire the freehold, either individually or collectively
[3] the First-tier Tribunal (Property Chamber) in England, and the Residential Property Tribunal Wales in Wales
[4] but see our recent briefing on proposals for a dedicated Housing Court