Law Commission Consultation – A Fairer Deal for Leaseholders of Houses and Flats: leasehold enfranchisement reform

So, this certainly is a piece of Leasehold Reform News …

We now have the publication of the Law Commission’s long awaited consultation on its proposed changes as these will affect the law relating to buying your freehold and extending your lease. You will note that even in the title they do not use the word ‘enfranchisement.’

We had a flavour of what lay in store when we received the report back to parliament as promised under the terms of reference that came out of the ‘Tackling Unfair Practices in the Leasehold Market’ Consultation. This was published on 20th July 2018 and we had the sentiment as set out in that document that in fact, rather than tackle the issue of leasehold houses on their own, the Law Commission’s proposal was rather to move towards a solution that would involve the rationalisation and simplification of the process of enfranchisement. Something of a ‘grand unified theory’ if you will, bringing together the right to extend your lease and also to purchase your freehold in a single statute with a simplified approach to valuation.

What we have now is the next step in the process. Don’t forget that the short snappy document released today (which runs to some 546 pages), is quite like a book on the whole topic. Not necessarily a bad thing, but it has to be borne in mind that this document is in fact is a Law Commission Consultation Paper (no.238 to be precise).

All interested parties have two months (until 20^thNovember 2018) to respond to the 135 questions that it poses.

The next step in this process after the consultation closes will be a full report with recommendations for change, although this is not likely to be published until during 2019. (i.e. the recommendations themselves may not be in a format that could be acted on until the end of next year).

This is likely to seem like a frustratingly slow pace of change for many organisations such as the LKP (Leasehold Knowledge Partnership) and the NLC (National Leaseholder Campaign) who are keen to see urgent and radical change in this area. They may well be right that the area is ripe for reform, but the process that has to be followed will require a further report back from the Law Commission with final recommendations for reform that parliament can then look at.

As to when the Parliamentary timetable will permit leasehold to be looked at is of course another question. The short answer is that with Brexit there may not be that much time for government to then find the available time to pass what will be – if these proposals are to be believed – a single grand unifying act bringing all enfranchisement rights together in one place. An objective that is very much to be commended and something that I and a number of commentators have been suggesting for years. One of the more satisfying things about the proposals is that they do bring to the fore the issues that ALEP (the Association of Leasehold Enfranchisement Practitioners) and others have identified to numerous housing ministers over the years as being inconsistencies between the various regimes that clearly warrant harmonisation.

One of the biggest bits of news, given that its terms of reference require the Law Commission to ‘examine the options to reduce premium whilst ensuring that compensation is still paid to landlords’ are the extent to which the proposals would affect the basis on which freeholds are valued. Some parts of the institutional market have already begun to take account of these possible changes but, because of the uncertainty, it is difficult to make any definitive statements as to what (if any) long term affect they will have on value.

Once the full consultation document is fully digested, I anticipate that there will be numerous parties that will want to make comments on this – as well they should – so that these proposed changes are as well thought out as they can be – I anticipate comments from politically interested groups, professional bodies and practitioner groupings such as ALEP, along with many other commentators.

It is certainly true that 2018/19 is shaping up to be an exciting time in leasehold and that there are going to be some significant changes in the next few years.

I have set out below (thank you to the Law Commission for providing their own summary document) a few highlights of the possible changes, which are a very handy summary to the key points from the consultation document:

Proposals for leaseholders of houses

Current law	Proposals
Different regimes for leasehold houses and flats.	One regime for both houses and flats, reducing complexity and costs.
Minimum two-year period of lease ownership before a leaseholder of a house can bring a claim.	No minimum period of lease ownership, reducing delay and costs for leaseholders.

Leaseholders of houses who wish to extend their lease (rather than buy their freehold) only able to extend their lease once, by 50 years at a (relatively high) “modern ground rent”.	Leaseholders of houses able to extend their lease for a longer period, at a nominal rent. No limit on number of extensions.
Where an estate includes houses and flats, the leaseholders of houses cannot join with the other leaseholders to acquire the whole estate.	A right for all leaseholders on an estate (whether they own a flat or house) to join together to acquire the freehold to the whole estate.
Separate procedures apply to each of the different enfranchisement rights.	A single procedure to apply to any enfranchisement claim, reducing complexity, confusion and costs.
Frequent challenges by landlords to the validity of notices given by leaseholders	Limiting the types of challenges to notices that can be made.
No procedure for dealing with missing landlords where a leaseholder wishes to extend the lease of a house. Procedures for dealing with missing landlords in other cases complex and costly.	Common procedure for dealing with missing landlords, ensuring leaseholders can exercise rights and save costs.
Both leaseholders and landlords can dispute terms on which freehold is transferred or lease extended.	Ability to argue about terms restricted.
The power to determine disputes is split between the county court and the Tribunal. A single claim may require a number of separate applications to be made before it is concluded.	All disputes to be determined by the Tribunal, reducing complexity and costs.
Leaseholders of houses are required to pay their landlord’s reasonable non-litigation costs.	Leaseholders no longer required to pay their landlord’s non-litigation costs or those costs to be controlled; for example, through a fixed costs regime.
Most favourable valuation basis only available to leaseholders who satisfy complex financial criteria.	Replacing financial criteria to reduce complexity and costs, whilst preserving most favourable valuation method for those who already benefit.
Valuation is complex and requires leaseholders to obtain expert valuation evidence in respect of each element of the valuation (including the value of the term, the reversion, any marriage value, and other elements), and legal advice to resolve disputes.	Options to reduce premiums payable by leaseholders of houses including: a simple formula (ground rent multiplier, or percentage of capital value) the removal of, or prescription of rates for, some or all elements of the valuation.Sufficient compensation to be paid to landlords.

Proposals for leaseholders of flats

The consultation paper sets out a series of provisional proposals for a new, single enfranchisement regime for leaseholders who want to buy their freehold or extend their leases.

Current law	Proposals
All claims
Different regimes for leasehold houses and flats.	One regime for both houses and flats, reducing complexity and costs.
No prescribed forms for claims by leaseholders of flats, and frequent challenges by landlords to validity of notices given by leaseholders. Risk that leaseholders’ notices are deemed withdrawn, so the claim fails, if procedural time limits are not met.	Prescribed forms for making and responding to any enfranchisement claim, making mistakes less likely to occur. Limiting challenges to notices and removing deemed withdrawal, preventing unnecessary costs and landlords taking advantage of leaseholders’ mistakes.
Procedures for dealing with missing landlords of flats is complex and costly.	Leaseholders to apply to the Tribunal so the claim can continue and be finalised, ensuring leaseholders can exercise their rights, and saving costs.
Both leaseholders and landlords can dispute terms on which freehold is transferred or lease extended.	Ability to argue about terms restricted.
The power to determine disputes is split between the county court and the Tribunal. A single claim may require a number of separate applications to be made before it is concluded.	All disputes to be determined by the Tribunal, reducing complexity and costs.
Leaseholders of flats are required to pay their landlord’s reasonable non-litigation costs.	Leaseholders no longer required to pay their landlord’s non-litigation costs or those costs to be controlled; for example, through a fixed costs regime.
Valuation is complex and requires leaseholders to obtain expert valuation evidence in respect of each element of the valuation (including the value of the term, the reversion, any marriage value, and other elements), and legal advice to resolve disputes.	Options to reduce premiums payable by leaseholders of flats including: a simple formula (ground rent multiplier, or percentage of capital value) the removal of, or prescription of rates for, some or all elements of the valuation.Sufficient compensation to be paid to landlords.

Additional proposals for lease extension claims
Minimum two-year period of lease ownership before a leaseholder of a flat can bring a claim.	No minimum period of lease ownership, reducing delay and costs for leaseholders.
Additional proposals for collective enfranchisement claims
Where a building contains only two flats, the leaseholders of both flats must participate in a claim to acquire the freehold.	The leaseholder of one of the two flats can bring a claim to acquire the freehold, stopping one leaseholder from blocking a claim by another.
No right to join an earlier collective freehold acquisition.	A new right to participate in an earlier collective freehold acquisition, stopping leaseholders from being locked out of ownership.
Successive collective freehold acquisition claims by competing groups of leaseholders resulting in “ping pong” claims.	No collective freehold acquisition claim can be made if one has been made in the previous five years.
Landlords can choose to take a long lease of any part of the building not held by leaseholders (for example, flats held on a short tenancy, or commercial units).	Leaseholders can require a landlord to take long leases of any parts of the building (except common parts) which are not let to participating leaseholders, reducing the cost of acquiring the freehold.

What do the Proposals mean for landlords?

The Law Commission was asked to propose reforms that will provide a better deal for leaseholders as consumers. This means that of necessity one of the outcomes would be a reduction in the amount of compensation that freeholders will receive. This is likely to have political impact and also be the subject of challenge in any political implementation process. The Law Commission have been at pains to point out in their document that whilst the level of compensation may be reduced their view is that this will be compatible with the Human Rights Legislation. How this will play out in practice and or implementation remains to be seen.

A claim by a group of leaseholders together to buy the freehold of their block.

Current law	Our proposals
Different regimes for leasehold houses and flats.	One regime for both houses and flats, reducing complexity and costs.
A collective enfranchisement claim cannot be made if more than 25% of the building has non- residential use.	The 25% limit to apply to all freehold acquisition claims, allowing landlords to retain buildings with substantial commercial use.
No obligation on leaseholders acquiring a freehold within an estate to continue to contribute to the costs of maintaining the estate.	A power to require contributions to be made after the freehold is acquired, allowing estates to continue to be maintained.
Separate procedures apply to each of the different enfranchisement rights.	A single procedure to apply to any enfranchisement claim, reducing complexity, confusion and costs for all parties.
No prescribed forms for claims by leaseholders of flats.	Prescribed forms for making and responding to any enfranchisement claim, making mistakes less likely to occur.
Frequent challenges to the validity of notices given by leaseholders and landlords.	Limiting the types of challenges to notices that can be made.
A landlord who has failed to serve a valid counter-notice on the leaseholder of a flat is forced to sell on the terms proposed in the leaseholder’s notice of claim.	The terms to be determined by the Tribunal in such cases, removing windfall gains for leaseholders.
The power to determine disputes is split between the county court and the Tribunal. A single claim may require a number of separate applications to be made before it is concluded.	All disputes to be determined by the Tribunal, reducing complexity and costs for all parties.
Valuation is complex and requires parties to obtain expert valuation evidence in respect of each element of the valuation (including the value of the term, the reversion, any marriage value, and other elements), and legal advice to resolve disputes.	While options to reduce premiums necessarily benefit leaseholders, changes to the procedure may benefit both parties. For example: prescribed rates would prevent disputes provision of an online tool to calculate the premium makes the process quicker and easier for both parties.
Valuation disputes are resolved by the Tribunal at a full hearing with expert evidence produced by both parties.	Low value claims to be resolved by a valuation member of the Tribunal alone, without the need for a hearing or expert evidence, reducing delay and costs.

The detail of the proposals in relation to valuation are too complex to go into here but there are a number of the models in the document that set out how this might be achieved. Those interested would do well to visit the Law Commission’s website and make their views known in the consultation.

As stated above, the coming year is likely to see big changes in residential leasehold.

Mark Chick

20th September 2018

To discuss any of the issues raised in this article or to contact Mark Chick please email leasehold@bishopandsewell.co.uk. If you require legal advice please visit www.bishopandsewell.co.uk