New proposals for leasehold reform…

Leasehold reform:

The Law Commission
of England and Wales has published a new report outlining the options
to simplify the rules for leaseholds and reduce the cost to
leaseholders when they buy the freehold or extend the lease to their
homes.

This is important
for many landlords because they may be leaseholders or freeholders or
in some cases both, depending on where and how they invest.

The Government’s
latest estimates show there were 1.4m leasehold houses in England in
2015-16, compared with the previous estimate of 1.2m in 2014-15,
following a change in methodology to include socially rented
properties.

There are also
around 2.9m leasehold flats, up from 2.8m previously thought. In
total, nearly one-fifth of all properties in England are leaseholds.
This stems from an explosion of apartment building in big cities, but
it’s down to developers’ controversial move to selling new homes
as leasehold instead of allowing a freehold title.

Many thousands of
new homebuyers have been caught-up in the controversy of ground
rents’ costs spiralling out of control on leasehold properties,
which have in some cases left owners of homes in virtually unsaleable
properties.

Reforms

The reforms have the
potential to make the process of leasehold enfranchisement easier and
more affordable for the millions of leaseholders throughout England
and Wales.

The report suggests
a range of options to make it cheaper for leaseholders to buy their
freehold or extend their lease. As well as reducing the price, these
options are intended to clarify and simplify the law, making the
process of leasehold enfranchisement easier and less expensive to
operate.

The Government had
asked the Law Commission to review the law of leasehold
enfranchisement following recent publicity about leaseholders finding
themselves at the mercy of developers and freeholders when they
signed up for leases on new-build properties. The Government’s
stated aim was to promote transparency and fairness in the
residential leasehold sector and provide a better deal for
leaseholders.

On the question of
valuation, the Law Commission was tasked with providing options to
reduce the premium (price) payable when both existing and future
leaseholders want to enfranchise their homes, whilst ensuring
sufficient compensation is paid to landlords to reflect their
legitimate property interests.

The report
re-examines the method by which the value of a landlord’s interest
is calculated, and therefore to identify possible reforms that could
lower the lease premiums, without at the same time breaching the UK’s
human rights legislation that protects the landlord’s property
interests.

The report puts
forward three suggested key schemes for determining the premium, each
of which will make enfranchisement cheaper, saving leaseholders
money. Each scheme uses a different method to determine the price of
enfranchisement and allow further reforms to make the process simpler
and to reduce uncertainty, says the Law Commission.

The report explains
how a simple formulae (for example a simple multiple of ground rent)
could be used in a new system, but explains that their wider use is
not possible under the UK’s human rights laws.

The Commission
puts forward a range of other options for reform:

• Prescribing the
  rates used in calculating the price, to remove a key source of
  disputes, and make the process simpler, more certain and predictable
• Helping
  leaseholders with onerous ground rents, by capping the level of
  ground rent used to calculate the premium
• The creation of
  an online calculator for determining the premium to make it easier
  to find out the cost of enfranchisement, and reduce uncertainty
  around the process
• Enabling
  leaseholders who are collectively enfranchising a block of flats to
  avoid paying “development value” to the landlord unless and
  until they actually undertake further development.

Professor Nicholas
Hopkins, Property Law Commissioner has said:

“We were asked to
provide options for reform that save leaseholders money when buying
their freehold or extending their lease, while ensuring that
sufficient compensation is paid to landlords. This is what we’ve
done.

“We are ready to
help the Government in implementing whichever options for reform they
choose.”

Housing Secretary Rt
Hon Robert Jenrick MP said:

“I welcome these
proposals from the Law Commission which provide options to make it
simpler and faster for leaseholders to buy their freehold or extend
their lease.

“I will consider
the proposals outlined in this report carefully and set out our
preferred way forward in due course.

“We have already
committed to addressing the abuses of leasehold seen in recent years,
by reducing ground rents to a peppercorn level and limiting new
leasehold to apartments, save in the most exceptional circumstances.
The Competition and Markets Authority is examining the alleged
misselling of leasehold properties and I will also await their
findings with interest.”

Consultation and
Progress:

The Commission has
said they consulted widely in putting together the options for
reform.

“Leaseholders have
advocated sweeping reform to lower the cost of enfranchisement of
their homes. We have heard contrary arguments from landlords and
investors – including charities and pension providers – the value
of whose interests would fall if premiums are reduced.”

The Law Commission
says it doesn’t hold views on which scheme and which other options
for reform should be adopted, as this is ultimately a decision for
Government.

Further
recommendations are to be made in the coming months for reforms to
improve the current complex enfranchisement system.

“We will also be
publishing reports on reforms to make commonhold a viable alternative
to leasehold, and on improvements to the law that gives leaseholders
the right to manage their

properties,” says
the Commission.

Mark Steggles,
partner at law firm Thomson Snell & Passmore on the Law
Commission’s report says:

“The Law
Commission’s report sets out a path for making leasehold
enfranchisement simpler, more transparent and cheaper for
leaseholders. The report sets out three alternative options for a new
regime for calculating the premiums payable to extend a lease or
purchase a freehold, and a further seven sub-options in terms of
items to consider when calculating the premiums for each regime.

“The potential
abolition of marriage value (which is the increase in value that
occurs where a tenant acquires the freehold) is the proposed reform
most likely to concern landlords as it would decrease the value of
the premiums payable by the tenants.

“However, this
proposed reform, together with the proposed introduction of
prescribed rates for calculating premiums and a suggested route for
capping the impact of ground rent escalators that are causing such
controversy at the moment, are likely to be warmly received by
leaseholders.”

You can read the
full report, summary and other supporting documents on the link
below:

Leasehold enfranchisement

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