MHCLG Announcement: Government reforms make it easier and cheaper for leaseholders to buy their homes:

https://www.gov.uk/government/news/government-reforms-make-it-easier-and-cheaper-for-leaseholders-to-buy-their-homes

7th January 2021

Big news in leasehold reform – this is Leasehold Reform News if ever there was…

Right in the middle of Brexit, with news of what might be termed a ‘democratic deficit’ (no pun intended), in America we have this announcement from MHCLG that Robert Jenrick as Housing Secretary plans to get government to act on the proposed reforms to residential leasehold.

For those who have been following this story this is the culmination of the journey that started with the commentary in the White Paper ‘Fixing our Broken Housing Market’ and then led to the paper ‘Tackling Unfair Practices in the Leasehold Market.’ After this we had the Law Commission’s extensive work on the proposed reforms in this areas which led to the publication of their output paper ‘Leasehold home ownership: buying your freehold or extending your lease’ published on 20th July of last year.

Government now plans to act and this announcement makes plain their desire to adopt a number of the Law Commission’s recommendations, although what is also clear is that they plan to do this in two stage, the first most likely to be to take steps to ban ground rents and the second to pave the way for more comprehensive leasehold reform.

The exact details will become clearer in due course, but the headline news items that we can take away from today’s announcement are as follows:

• no more marriage value

• 990-year lease extensions at nil rent

• An industry wide commission on Commonhold – a ‘Commonhold Council’ charged with preparing the way to make this work

These are all massive changes and shows the government’s resolve to pick up on a number of the key recommendations in the Law Commission’s report.

Some initial comments on these appear below:

No more marriage value

This is massive and will not be popular with freeholders to say the least. It certainly will make it ‘cheaper’ to extend a lease or buy the freehold.  There is also an indication that a calculator will be made available to determine claims, whether the ‘calculator’ is to apply to all claims, or just simpler or lower value claims remains to be seen.

However, the proposal to remove marriage value (which often comprises up to 1/3 or more of the premium in many mid-lease length cases) is big news. There is almost certain to be a challenge from the larger freeholders under Human Rights legislation or similar. If we consider the position of say a high value flat on one of the Central London ‘Great Estates’ this is going to be significant.

990-year lease extensions at a nil rent

This is not a surprise – the plus 90-year lease extension has just been upgraded, by another 900 years and so won’t need doing again.

The nil rent element is no surprise either as this was (and is) the case for statutory extensions as things stand. The ‘surprise’ is in relation to leasehold houses – the new lease will be at a nil rent rather than the ‘modern ground rent’ under the plus 50 year extension that exists (and is never used) at the moment. You might ask what the point of this is – but it does give a leasehold house owner the right to make the lease much longer and buy out any existing ground rent in one go – although the current note is silent on buying the freehold – presumably MHCLG will propose to adopt in due course the Law Commission’s recommendations on making ‘units’ enfranchiseable so that both flats and houses are subject to the same regime.

The relevance to houses is a particular response to the so called ‘Leasehold Scandal’ of leasehold houses being sold by developers with onerous rent terms which in part have sparked the governments interest into reforming the law in this area.

Nil rent

It also appears that a cap will be set on the sort of ground rent that can be charged if lease is renewed outside of the statutory process. The detail is currently unclear, but possibly this may follow the Law Commission’s recommendations that any new rent could be imposed only during the existing lease term and might be subject to an overall cap. There is certainly an indication of a cap on the ground rent payable. 

Commonhold

We’ve been here before – when the Commonhold and Leasehold Reform Act 2002 came into force, in 2003, but this time there does appear to be a willingness to recognise that unless it can be made fit for purpose and also the “industry standard” (and possibly also compulsory?) there will be no take up.

An industry-wide cross sector committee would be very welcome to iron out the issues and to set the frame for other reforms that may be needed to make it work. Unfortunately, the current version of Commonhold is not sophisticated enough – and proper refinement for implementation may require other areas of law to be dealt with as part of this process.

So, what next?

As ever with a packed parliamentary agenda including both Brexit and Covid-19 we will have to wait and see. However, this announcement does make plain that legislation will be brought forward in ‘in the up and coming session of parliament’ to set ground rents to zero. The announcement states that this is part of a two-stage process of reforming the law with a response to the remaining Law Commission recommendations ‘in due course.’ That appears to indicate a longer time frame for the wider reforms.

Mark Chick

7th January 2021

We start our afternoon session with Mark Chick @section42, Katherine Simpson @EdwinCoe and Richard of @BeckettandKay This Hague House Clinic and Q&A session designed to give all delegates the lowdown from this week’s morning sessions. Questions and debate welcome! #ALEPConf pic.twitter.com/HOmz075jqU

— ALEP (@ALEPofficial) October 15, 2020

Just following up on a question raised during the Q and A session at the ALEP conference 2020 on 15th October 2020

The question concerned the rights of shared ownership tenants to extend their leases.

The position is unclear as the relevant case law shows. Whilst the Brick Farm case (see notes below) held that shared ownership leases were qualifying tenancies for the purposes of the 1993 Act as regards collective enfranchisement, so far as I am aware there is no reported case where a shared ownership lease has been the subject of a statutory lease extension under the 1993 Act.

I known that various housing association providers will do lease extensions on a voluntary basis and there is commentary on this in the Law Commission’s Consultation Paper (see paragraphs 9.24 onwards). However I am of course putting this out there so that if anyone knows different they can shout about it.

As we said in the session, if the position was completely clear cut then the Law Commission would not have mentioned both in the Consultation Paper and in their July report that the position needed to be clarified. They also recommend in both documents that future legislation addresses this issue- so that owners of shared ownership leases who have not staircased up to 100% should be able to extend under statute.

That is course leaves the slightly vexed question of how such lease extensions are to be valued. I was very glad that we had Richard Kay in our session so that I was able to pass this hypothetical question over to him.

That is one other thing that any proposed reforms will have to address when looking at the options to reform the valuation mechanism(s) for statutory cases.

Mark Chick

15th October 2020

I have set out the summary from the Consultation Paper below as it contains an excellent discussion of the relevant case law and sets out the Law Commission’s views.

So, is this going to be the biggest change in enfranchisement in the last 17 years ?

The law Commission have today published their long awaited report into the legal aspects of the proposed reforms for the law in this area.

The Commonhold Leasehold Reform Act 2002 was the last big legislative foray into reform in this area, which came into force in 2003.

Bearing in mind the non-neutral terms of reference that the Law Commission were given the proposals seek to redress the balance between landlords and tenants and show a big change of emphasis towards the tenant’s side of the equation.

https://www.lawcom.gov.uk/project/leasehold-enfranchisement/

There are also two other reports on the Right to Manage and Commonhold. I set out below the key enfranchisement changes from the Law Commission’s own summary document as they propose them in their own words. The main report runs to 859 pages ! So there is plenty more to read and digest in the days and weeks ahead.

“Enfranchisement rights — our key recommendations

• We recommend that leasehold owners of houses and flats should no longer have different enfranchisement rights, reducing the complexity of the current system. Wherever possible, our recommendations apply uniformly, irrespective of whether a property is a house or a flat.

• We recommend that leaseholders of both houses and flats should have a new right to a lease extension for a term of 990 years, in place of shorter extensions of 90 or 50 years under the current law. There would be no ongoing ground rent under the extended lease, and landlords could not use the lease extension process to impose new, onerous obligations. Our recommendations place the vast majority of the home’s value in the hands of the leaseholder, preventing the need for further extensions and providing increased security for the leaseholder.

• We recommend a new right for leaseholders with very long leases to “buy out” the ground rent under their lease without also having to extend the length of their lease. This will enable those leaseholders to free themselves from the ongoing obligation to pay ground rent.

• We recommend that the scope of enfranchisement is expanded so that more leaseholders can buy the freehold or extend their lease. We recommend that leaseholders should be able to enfranchise immediately after acquiring their lease rather than having to wait two years, as they do now. And flat owners should together be able to buy the freehold of premises where up to 50% of the building is commercial space rather than the current limit of 25%.

• We make several recommendations to make it easier for leaseholders of flats to enfranchise. For example, we recommend that groups of flat owners should be able to acquire multiple buildings (such as an estate) in one claim, rather than incurring the unnecessary expense of acquiring each building individually. We recommend that leaseholders should be able to require landlords to take “leasebacks” of units within the building which are not let to leaseholders participating in the claim, which will significantly reduce the price that leaseholders must pay.

• We make recommendations to protect leaseholders from the imposition of onerous or unreasonable obligations when they buy the freehold of their house or flat. In particular, our recommendations protect leaseholders from obligations which are designed to generate a profit or provide an ongoing income stream for landlords.

• We recommend replacing the various procedures for making enfranchisement claims with a single, efficient procedure. This procedure removes the legal traps which cause claims to fail and which enable unfair procedural or tactical advantages for landlords with experience of the system.

• We recommend that the current requirement for leaseholders to pay their landlord’s costs of dealing with an enfranchisement claim should be eliminated or controlled. Leaseholders must currently pay their landlord’s uncapped costs, which can exceed the price that leaseholders have to pay to their landlords in an enfranchisement claim. The approach we recommend depends on Government’s response to the options we have presented about how to calculate the price but, either way, leaseholders will know up front what the costs of a claim will be.

• We recommend that, where possible, the Tribunal should determine enfranchisement disputes and issues, replacing the current division between the Tribunal and the county court. Alongside the role of the Tribunal, we recognise the importance of alternative dispute resolution. Our recommendations will save leaseholders and landlords time and money.

• Landlords and leaseholders can enter into voluntary agreements (for example, freehold transfers) that are not consistent with our recommended statutory scheme. Those agreements fall outside our Terms of Reference, but we recommend that Government consider taking steps to regulate these transactions to prevent leaseholders from being persuaded to agree to lease extensions or transfers that have been drafted on unreasonable terms.”

Comment

What does all this mean? Well, it shows the direction of travel and of course this report would have to be turned into law by a future parliament. That itself could take some time and might indeed not happen, or the changes might be quite different once parliament has had their hands on them.

However, this all has to be seen in the context of a set of wider proposed changes – banning the creation of new leasehold houses, and separate government proposals to ban ground rent for new leases. There is an agenda of change and there will be a lot of work to do on the detail of this, but this report does set the agenda for a big sea change in this area.

However, it is likely to be a good 3-5 years before any of these recommendations might become law, as this depends on parliamentary time and inclination.

A lot to digest, but interesting times ahead in leasehold – watch this space!

Mark Chick

21st July 2020

So we now have the eagerly awaited paper from the Law Commission on their ‘options for reform’ as regards the law on valuation.

What does this mean?

The Law Commission were given the objective of making it cheaper and easier to buy your freehold or extend your lease.

Ultimately that involves a political choice for government about how to do this. Reforming the basis of on which valuations are carried out of necessity means making ‘winners and losers’ between landlord and tenant.

Clearly, given the direction of travel on this the Law Commission have explored various ways to bring down the cost but ultimately recognise that the choice of which path to follow is a political rather than a purely legal decision and as such they have set out three main options which are set out below.

Option 1

Term and reversion – essentially allowing the premium to be calculated by reference to lease length and ground rent only. There would be no marriage value regardless of lease length.

Comment

Essentially this would do away with marriage value entirely and be massively unpopular with freeholders. It might also be open to challenge by freeholders under the Human Rights legislation.

Option 2

Get rid of marriage value and replace it with Hope value.

In other words in cases where the lease has under 80 years the tenant would have to pay only a fraction of the marriage value – as if the fact that the tenant were actually carrying out the transaction was to be disregarded and the freeholder would only get compensated relative to what a third party (who wouldn’t know that the transaction was actually going through) would pay.

Typically hope value is between 10-20% of the full marriage value and so this reform would make it cheaper instantly for the 20-30% of transactions every year that have less than 80 years to run.

Comment

This would be unpopular with freeholders, but less so than option 1 above. Tenants and particularly those with short leases would be very much better off overnight.

The paper discusses how in the case of a freehold the collective might defer ‘hope value’ by agreeing an overage clause with the freeholder meaning that this sort of value would be paid out in the future when and if the development might actually take place.

Option 3

Leave things ‘as they are’ but prescribe certain parts of the calculation.

This has the advantage of brining more certainty, but comes with the extremely political choice of where to draw the line (quite literally, in the case of a relativity curve) or in terms of the specifics of say the capitalisation rate or discount rate. Both of these have been the subject of tribunal decisions, but this could be ‘set in stone’ thereby avoiding argument.

Comment

Option 3 is essentially the ‘status quo’ with some tweaks. Those tweaks might well make it easier as they would prescribe some or all elements of the calculation and it set in a particular way would also lean towards leaseholders by making the premium cheaper.

In addition, the more parts that are prescribed the less work that there is for valuers to do. Bad news for valuers, but better news for public certainty. It would be easier for people to know ‘up front’ what their lease extension or freehold is going to cost.

Other options

The paper is not short (242 pages to be precise), and so it does also outline some other ideas, which the Law Commission call ‘sub-options’ – these essentially blend in some other ideas with the 3 main suggestions. The best of which, in my view, is the development and use of a prescribed calculator for lower value or straightforward claims.

In summary

This paper gives government lots of good options to consider when drawing the political lines on what really does amount to the redistribution of both wealth and power in the leasehold sector.

It won’t be radical enough for some people, but then that is entirely to be expected. The Law Commission are at pains to point out that any change that is too radical would be open to challenge under the Human Rights legislation, a point which those who want to see real and lasting change for leaseholders would do well to bear in mind.

Mark Chick

9th January 2020