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Leasehold home ownership – buying your freehold or extending your lease

Posted on 14 November 2018

Leasehold home ownership – buying your freehold or extending your lease

First we had the consultation on the grant of new leases and whether there should be limits on the ground rents and ban on leasehold houses. The next focus was on short term tenancies and agent's fees and now the government's sights are firmly set on existing long leases and the enfranchisement regime.

Created by the Leasehold Reform Act 1967, enfranchisement originally granted rights to leasehold residents of some houses to acquire the freehold in return for compensating the landlord on the basis of lost ground rent for the remainder of the term. Alternatively, tenants had the right to extend the lease of the property by 50 years subject to paying a revised ground rent. Over time, through changes to existing legislation, new legislation, secondary legislation and case law, these rights have been expanded and extended to include higher value properties, flats and blocks of flats and the basis of calculation of the premium has been updated. It is a complicated and highly specialized area of practice for lawyers and valuers.

The government's new consultation, 474 pages  plus 135 questions and appendices, seeks views on how to simplify the legislation, improve access to enfranchisement and reduce the premiums payable. It closes on 7 January 2019.

It focusses on four key areas:

  • The rights which leaseholders should have under any new legislation
  • Who should be entitled to exercise those rights
  • How the rights should be exercised (i.e. procedural reform)
  • The costs to enfranchise

The consultation is long and detailed and appreciates both sides of the arguments. There is also a 25 page summary document which provides a more detailed introduction to the consultation.  If you do decide to respond to the consultation you only need answer the questions you are interested in.

What rights should be available under the new legislation

Better news for all is that the government is looking to plug the holes in current legislation and make the whole system more practical. Some of the proposals for consideration include:

  • Better provision for tenants to continue to make estate maintenance contributions where just one block on an estate is enfranchised. This would help preserve the integrity of the whole estate
  • Requiring landlords to take leasebacks of commercial premises or unlet / non-participating flats.  This would reduce the premium for the tenants but could complicate the management structure of the block
  • Tenants of flats and leasehold houses on an estate should be allowed to acquire the whole estate collectively should they wish.  This would help where the distribution of participating tenants on an estate is uneven between blocks assuming that the proportion of participants would be measured on an estate rather than a per-block basis.
  • The right for tenants who don't participate in a collective claim to join in later with the calculations for their contributions to costs and the premium built in to the legislation.
  • Various different options on lease length and rent payable. This could be complicated but might give tenants more affordable choices for increasing their property interests.

Exercising the rights

To simplify the procedure for all tenants it is proposed that:

  • the same application process should apply to  all claims with standard form notices, standardised time limits and limited ability for landlords to contest the validity of notices
  • a list of prescribed terms should be available for any amendments required to new leases or draft transfers to level out landlord / tenant bargaining power
  • claims will automatically transfer with the underlying lease on sale / purchase

This makes good sense and will reduce arguments, however, properties are all different and making sure that prescribed clauses are suitable and sufficient for every eventuality would be a difficult task.

Fees

Currently tenants who are required to reimburse the landlord for the costs of investigating a claim and dealing with a transfer of the property. It is suggested that landlords could be required to bear more of their own costs. This is, of course, in addition to receiving a reduced premium for the property in relation to a claim which they did not invite: an inviting prospect for tenants (if not landlords) which would certainly meet the government's criteria for improving access to enfranchisement.

Valuation proposals

James White and Angus Fanshawe of Fanshawe White LLP, a firm of valuers, agreed to comment on the valuation aspects of the consultation:

The Law Commission is tasked with looking at the options of making lease extension or freehold enfranchisement premiums cheaper, while ensuring "sufficient compensation" is paid to freeholders to reflect their legitimate property interests. 

The definition of ‘sufficient compensation’ will be open to debate, impossible for the Law Commission to determine and we must expect any decision subsequently made by Government to be hotly contested by all parties. 

There are a number of proposals put forward by the Law Commission:

  • A simple multiplier of ground rent which will make the premium substantially cheaper but fail to compensate the freeholder for the loss of reversionary value. This but would only be considered fair by freeholders if the lease is so long as to render the reversionary value nil in any case.
  • Value the premium at a percentage of the value of the property. This option fails to take into account any lease terms, or ground rent payable.
  • Restrict the capitalisation of ground rent to, say, 0.1% of the property value. Where high ground rents are payable by leaseholders, this proposal would be unfair on freeholders who rely on ground rent income.
  • Keep the valuation basis as it is currently, but  prescribe some of the valuation inputs, e.g. ground rent capitalisation rates, deferment rates and, most contentious of all, relativity.  Prescription would remove most of the elements to be agreed between leaseholder and freeholder, but still leaves the flat or house value to be agreed: the most disputed component of any valuation. Prescription would be difficult to introduce when there are variations to the valuation of various incomes, property types and locations, and market conditions will change as time passes. Prescription, if introduced, will always be unfair to someone.
  • Remove marriage value (a proposal which has appeared a number of times over the years) and keep the premium limited to reversionary value and ground rent capitalisation, maybe also prescribing deferment rate and capitalisation rate. All the benefit of extending a lease or buying the freehold would go to the leaseholder with nothing to the freeholder, and would substantially reduce premiums on any property with a lease under 80 years.

How much premiums will be reduced, and by what means, will ultimately be a political decision, but any attempt to reduce premiums, which fulfils the Law Commission’s terms of reference, while welcomed by leaseholders will be contested by freeholders who would consider the proposals are unfair on them. The Law Commission has been set a very difficult, if not impossible task.

Who should be entitled to exercise the rights?

At present, the ability of tenants to exercise rights can depend on length of ownership, rent due under the lease and rateable value of premises as well as whether or not premises are actually a house or a flat and how many flats the tenant owns.  It is proposed to level the playing field so that any leaseholder of whatever period and however many flats has the opportunity to increase their interest in the property for a reasonable sum.

It seems strange that the government is using tax (by way of SDLT, ATED and CGT) to discourage foreigners, second home owners and investors from acquiring property and yet, by broadening still further the extent of the enfranchisement legislation by (historically) removing the residency requirement and now, removing  the two year ownership requirement, it is in fact making it easier for these categories of proprietor to increase their property interests and, potentially, at a lower cost.

Conclusion

Personally, the attraction of enfranchisement when I started in practice as an estates lawyer was the thrill of acting as an amateur sleuth, checking out the eligibility of a tenant and whether they had been truly resident at the property for the requisite period, protecting my landlord clients from the loss of their assets. Over the years, the excitement has been removed along with the evidential hoops and my allegiances have changed along with my legal roles. The thoughts behind the consultation are well overdue and will inevitably result in a fairer process for tenants. The result for landlords remains to be seen.

An
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