Leasehold Reform: the Law Commission Consultation Proposals
The long‑awaited Law Commission Consultation Paper (Consultation Paper) on reforming leasehold law was published in September 2018.
This was in response to the significant pressure that the Government has been under to reform the law on leasehold property ownership, particularly due to the rise of so-called “toxic leasehold houses” sold by new build property developers and the bad press this has gathered.
The Consultation Paper set out a range of proposals on reform of the following (collectively referred to as enfranchisement):
- Rights to purchase the freehold of a leasehold house
- Rights to collectively purchase the freehold interest of a block of flats with other co‑leaseholders, and
- Rights to extend the lease of a house or flat
The consultation closed in January this year and the Law Commission received over 1,200 replies to the proposals, clearly demonstrating the level of interest in this area.
Their final report on the options for reducing the price of enfranchisement is due by the end of October 2019, and their final recommendations for reforming all other aspects of the enfranchisement regime will be published by February 2020.
What are the problems with leasehold property?
Many leasehold property owners are unfamiliar with the implications of buying a leasehold property, with an increasing number of people who bought leasehold houses alleging that they were mis-sold.
In the midst of the mounting criticism of house developers, who disposed of large numbers of leasehold houses on increasing ground rent provisions (in some cases doubling over a period of time), there has been both public and media pressure for the Government to take action to penalise unscrupulous landlords and even prohibit the sale of new‑build leasehold houses.
In recognition of the contentious issues created by current enfranchisement laws the Law Commission is seeking to redress any unfairness in the system. However they also have to balance the requirement with ensuring sufficient compensation is paid to landlords.
The Law Commission proposals
The Consultation Paper gave a range of proposals for change to the current enfranchisement laws. Some of the key proposals and current areas of enfranchisement law and practice potentially up for reform are set out below.
- The right to a lease extension
- Simplification of the process of applying for a lease extension
- Abolition of the two year ownership rule to qualify for a statutory lease extension
- Review of the landlord’s legal costs which are payable by the leaseholder (with a possible fixed fee regime, or no requirement to pay the landlord’s legal costs)
- Use of a simplified formula for calculation of the premium payable
- Review of the current practice of some landlords granting lease extensions on a ‘negotiated’ basis. These so called ‘negotiated’ leases are in effect granted on the landlord’s terms (invariably less favourable than the statutory terms), with the leaseholder being offered the same on a ‘take it or leave it’ basis. Many leaseholders currently opt for a ‘negotiated’ lease extension, so as to have certainty as to costs and timescales, as the converse statutory application for a lease extension can take up to a year to complete if terms are not agreed and the matter could end up in the First-tier Tribunal (Property Chamber) for determination of terms
- Collective enfranchisement rights
- The right to acquire the freehold of a building individually (where there are only two flats in a building)
- The right to acquire the freehold of a whole estate collectively (the current rules provide that you can only apply to acquire the freehold per individual block of flats on an estate)
- A new “right to participate” regime, which will provide the right for leaseholders who didn’t participate in a previous collective freehold acquisition to do so later (this will redress a situation where certain leaseholders are excluded from a collective enfranchisement claim, or where they couldn’t participate at the time, but later are in a position to do so)
- Introducing a requirement for the landlord to take a leaseback of any part of the property not let to participating leaseholders, thereby reducing the purchase price, as the leaseholders will not have to pay a premium for the freehold of those parts being leased back to the landlord
- Making the law easier in practice
It is proposed to have one scheme of qualifying criteria for flats and houses, with reference to a ‘residential unit’, as opposed to a house or flat. Practical solutions proposed to simplify the enfranchisement process include:
- A single, simple procedure which applies to any enfranchisement claim
- The validity of notices being able to be challenged only on a limited number of defined grounds
- No deemed withdrawal where a leaseholder has missed a statutory deadline
- Automatic assignment of the notice upon assignment of the lease, thereby making it easier to sell a leasehold property which has a short lease term, once the notice to extend has been served
- There are also proposals to simplify current Court procedures. The existing statutory position requires some matters to be applied for and dealt with in the County Court, whilst some are determined by the First-tier Tribunal (Property Chamber). The proposal is for all disputes to be determined by the Tribunal. The Law Commission is proposing that the Tribunal’s current (limited) powers to order one party to pay the other party’s litigation costs should apply to all disputes it determines. Practitioners will welcome these changes, as it will give clarity as to jurisdiction and with regard to the recovery of costs, as currently each party bears its own costs in the Tribunal
Simultaneously with the Law Commission’s proposals the Ministry of Housing, Communities & Local Government issued its consultation paper on implementing reforms to the leasehold system in England.
The consultation closed on 26 November 2018 and sought views on banning the unjustified use of a leasehold structure for new houses, reducing ground rents to a nominal sum, implementing measures to make service charges fairer and more transparent, and controlling the level of fees charged and the time taken by a freeholder to provide leasehold information when a leasehold property is sold.
The proposed reforms by The Law Commission and the Ministry of Housing, Communities & Local Government are looking to redress the issues faced by leaseholders in the leasehold housing market.
However, this has to be balanced with the right of the freeholder/landlord to peaceful enjoyment of their property, and the right to rental income they are legitimately entitled to.
It is left to be seen which of the proposed reforms will actually make it through to legislation, but what can be guaranteed is that leasehold law will be subject to significant change.
If you would like to speak to our specialist Leasehold Enfranchisement team regarding your rights as a leaseholder or landlord, please don’t hesitate to contact us.
- Law Commission – Consultation paper on Leasehold home ownership: buying your freehold or extending your lease – 20 September 2018
- Ministry of Housing, Communities & Local Government – Consultation paper on Implementing reforms to the leasehold system in England – October 2018 Lease-advice.org