Law Commission Publishes Consultation Paper aiming to Reform Leasehold Enfranchisement

On the 8th January 2020 the government published a report exploring options to make leasehold enfranchisement cheaper and more accessible for leaseholders. 

More than six million properties in England and Wales are leasehold and just under 40% of new-build homes sold between 2017 and 2019 were leasehold according to the Leasehold Knowledge Partnership.

Unlike freeholders, leaseholders do not own their properties outright. They have a contractual relationship with the freeholder/leaseholder of their premises which may require them to obtain the freeholder’s consent to do certain things with the property, to pay the freeholder ground rent or to forfeit the property to the landlord in specified events. 

At 2020, Councils in England and Wales raised more than £27 million from leasehold extensions, with some leaseholders paying in excess of £500,000 to renew their lease. 

Leasehold Enfranchisement 

Leasehold enfranchisement is the process where a leaseholder exercises their right to do the following without the landlord’s consent:

• Purchase the freehold of their house;
• Participate with other leaseholders to collectively purchase a share of the freehold of their block of flats;
• Extend the lease of their house or flat.

Different rules and rights apply to leaseholders of flats than apply to leaseholders of houses. Both sets of rules are discussed separately below.

Leaseholders of Houses

Leaseholders of houses can negotiate the purchase of the freehold with the freeholder informally and agree on their own terms. This route is not advisable and leaseholders planning on purchasing their freehold should always obtain legal advice before doing so. 

Alternatively, the Leasehold Reform Act 1967 gives leaseholders of houses the right to apply to the First-tier Tribunal (Property Chamber) to purchase the freehold if they meet certain qualifying criteria, these are:

1. The house must be properly designed, adapted and reasonably defined as a house. This includes buildings which are not structurally detached, which are not solely designed or adapted for living in or which are divided horizontally such as maisonettes;
2. The tenancy must be a long tenancy. In the case of a residential tenancy, this is a lease granted for a term of years exceeding 21 years. In the case of a business tenancy, this is a lease granted for a term of years exceeding 35 years; and
3. The tenant, at the time of submitting their notice to purchase the freehold to the freeholder, must have been a tenant of the house for at least two years.

Leaseholders of Flats 

The Leasehold Reform, Housing and Urban Development Act 1993 gives leaseholders in a block of flats the right to collective enfranchisement. Leaseholders can come together to compel the freeholder to sell to them their respective share of the freehold to their block of flats. Once this has been done they can respectively extend their own leases or set their own ground rents; making the leasehold more marketable. 

Under the Landlord and Tenant Act 1987 (as amended by the Housing Act 1996) Landlords who want to sell the freehold of a block of flats have to offer to sell it to the leaseholders first. This is known as the right of first refusal.

To qualify for collective enfranchisement the leaseholders must meet the qualifying criteria set out below. 

1. Qualifying Tenant 

The leaseholders must be a qualifying tenant. This means that:

• The tenant must be in possession of a long lease (this requirement does not apply to business tenancies but for residential tenancies this means a lease granted for a term of years exceeding 21 years);
• No flat can have more than one qualifying tenant; and
• If a tenant would otherwise be considered to be a qualifying tenant of more than two flats in the same premises then they are considered not to be a qualifying tenant for any flat in the same premises. 

2. Qualifying Premises 

To qualify for enfranchisement under the 1993 Act the premises must meet the following conditions:

• The flats must be occupied for residential purposes only. Business leases of flats are excluded from enfranchisement;
• The enfranchisement application must relate to two or more flats held by qualifying tenants;
• The enfranchisement must relate only to flats - it cannot relate to shared or common areas of the flats such as hallways or fire exits; 
• The flats consist of a self-contained building or part of a building;
• Enfranchisement is unavailable where the flats have non-residential parts which exceed 25% of the total floor area of the premises; and
• The total number of flats held by the qualifying tenants must make up at least two-thirds of the total number of flats contained within in the premises.

Once these criteria have been met the leaseholders will want to commence the procedure to formally enfranchise. A notice must be given, by at least half of the qualifying tenants, to the freeholder of the flats. It is advisable to have this drawn up by a legal professional as prescriptive conditions apply to the form and details of the application. 

Leaseholders should enter into a formal participation agreement to govern their behaviour during the enfranchisement process. This is a binding contract between the leaseholders and again, legal advice should be sought before signing this document. The participation agreement will establish financial contributions, voting power and negotiation authority. 

The leaseholders then submit their Initial Notice to the freeholder who can either accept the notice or challenge it. The freeholder can only challenge on the grounds of invalidity or intention to redevelop the premises. If it is challenged then the parties enter into negotiation. If a settlement still cannot be reached then the application is referred to the Leasehold Valuation Tribunal which will reach a binding agreement. 

Valuation 

If these criteria are met then the leaseholder(s) will have the right to compel the freeholder to sell the freehold to them. The terms of the purchase must, however, still be fair and reasonable as determined by the First-tier Tribunal (Property Chamber). The tribunal will seek to balance the protections afforded to the leaseholders against the landlord’s legitimate property interests. The legislation surrounding leasehold valuations is complex and includes things such as the marriage value of the premises, the investment value and the calculation of any other losses the landlord has reasonably incurred as a result of the enfranchisement process. 

Reform 

The reform comes as a response to growing concerns over the leasehold market, including:

• Landlords and estate managers charging abusive and limitless ground rents;
• Leaseholders being left with unmarketable properties due to decreased demand for leaseholds - leaving them trapped in their properties; and
• Landlords charging exploitative fees to grant consent to alter the premises.

First-time home buyers who purchase a property may feel exploited and trapped when they realise that they are either unable to sell their property or that their property is worth much less than when they originally purchased it because potential buyers are discouraged by oppressive ground rents or strict rules. It is for these reasons that leaseholders can also find it difficult to get a mortgage. These issues, coupled with the complex rules surrounding leasehold enfranchisement mentioned above, have prompted the government to reform the area of leasehold enfranchisement altogether, making it easier for consumers to protect their property interests. As part of the government’s campaign to protect leaseholders, the Law Commission published a report in January 2020 detailing proposals to make leasehold enfranchisement easier, simpler and more accessible to consumers. Included in this report were proposals to:

• Ban the sale of new-build homes on a long leasehold basis;
• Reduce ground rents on new-build leaseholds to £0.00;
• Grant leaseholders who have been mis-sold a leasehold of new-build premises the right to purchase the freehold at no extra cost;
• Introduce a new time limit of 15 working days and a cap of £200 on fees for providing leaseholders with information such as details relating to the superior interests of the property or any notices made in respect of the premises. 

For more information relating to the proposed reforms to leasehold enfranchisement visit the government’s website.