Law Commission report on leasehold reform
On 21 July 2020 the Law Commission published their much anticipated report on proposed reforms to the law surrounding residential lease extensions and the ability to buy the freehold of your residential leasehold property.
A copy of the report can be found here, together with links to the reports for the Commonhold Project, the Right To Manage Project and the “Report on Options to Reduce the Price Payable” from January 2020.
The full report on leasehold enfranchisement runs to over 840 pages, but we highlight below some of the main recommendations which, if made into law by parliament, could significantly change lease extension claims and the ability for tenants of residential leasehold property to acquire their freeholds.
The report considered three main rights:
- The right to a lease extension
- The right of individual freehold acquisition
- The right of collective freehold acquisition
The right to a lease extension
Uniformity for leasehold houses and leasehold flats
Currently the owners of leasehold flats have different lease extension rights to owners of leasehold houses; it has long been considered that the rights of leasehold flat owners are more favourable. The report recommends that in future there should be a uniform right of lease extension for qualifying residential leaseholders, to a lease extension at a peppercorn (£nil) ground rent, as often as they want, in return for a premium (purchase price).
Extension of 990 years
Currently qualifying leaseholders of houses can claim 50 years extension and leaseholders of flats can claim 90 years extension to their existing lease. The recommendation is that this be an additional 990 years on top of your remaining lease term. This represents a significant change, meaning that lease extensions would only take place once in a lifetime.
Lease by reference to the Existing Lease
The recommendations for the starting point is that a lease extension is made by reference to the terms of the existing lease; i.e. that it is on the same terms as the existing lease. This is broadly the starting point for lease extension claims under the current law, but the recommendations go on to provide very limited scope for altering the existing terms to e.g. rectifying a defect, but preventing the parties from agreeing whatever terms they wish.
No two year ownership requirement
It is proposed that there should be no minimum ownership requirement for a leaseholder to qualify for a lease extension claim.
Shared Ownership leases
Proposals include that shared ownership leases, not ‘staircased’ to 100% share, should have the right to extend their lease, but not to an individual right of freehold acquisition until they have 100% share.
Automatic transfer of claim together with transfer of property
The report recommends provision for automatic transfer of an existing lease extension claim to pass to a buyer of the property automatically, UNLESS the purchaser elects not to take over the claim.
Just buy out the ground rent
The report suggests the new option for qualifying leaseholders to pay to ‘remove’ their ground rent without the need to extend their lease; this is likely to be welcome news to leaseholders with “onerous” ground rents who have a sufficiently long lease but the ground rent provisions make the property difficult to sell or mortgage.
Buying your freehold
Uniformity for leasehold houses and leasehold flats
Again here we see a move away from the distinction between leasehold houses and flats. These essentially all become leasehold ‘units’ instead and the proposed reforms then consider two rights will exist for the owners of leasehold units to buy their freeholds: an individual right, and a collective right.
The recommendations also move toward a unified and more simple process for freehold claims, using standard prescribed forms and reducing the current onerous burdens on the leaseholders.
The right of individual freehold acquisition
One particular recommendation stands out which will enable leaseholders qualifying for an individual freehold acquisition will be designed to overcome the hurdle of not all parts of the property being included in the lease (often leases of leasehold houses may exclude the walls or roof) which would otherwise prevent a claim under the current law; it is proposed in such circumstances the leaseholder should be able to claim the freehold of the whole building.
The right of individual freehold acquisition
Increase in mixed use buildings
In mixed use buildings (where there is a mix of residential and non-residential use) the law currently restricts claims for the freehold to those with no more than 25% non-residential use – this would be changed to 50%.
Use a company
It is recommended that collective claims must be made through a company with limited liability to help address a number of practical issues relating to shares in the freehold and day to day management and structure.
In order to make collective freehold claims cheaper and easier for groups of leaseholders, it is suggested that landlords will have to take mandatory leasebacks of certain parts i.e. areas not subject to a long lease plus for leaseholders who are not joining in the freehold claim.
Right to participate
On the subject of leaseholders not participating in the claim, there are also discussions surrounding the right for leaseholders who did not participate in a successful freehold claim to have a right to join in the freehold ownership later on, however it has been acknowledged that the complexities of this require further work – separate additional comment on this is on the Law Commission website.
Reform proposals generally
The overall aim of the reform can largely be considered ‘pro-leaseholder’ and aimed at making the current enfranchisement processes quicker and cheaper and there are various other proposals aimed at streamlining the processes and eliminating commonly contested elements of such claims – the extent all the proposals are outside the consideration of this article.
Tribunal ‘one stop shop’?
It seems that as well as the proposals to generally streamline the process by the use of unified claims processes and prescribed/template forms, the Law Commission further propose to reduce possible costs by nominating the Tribunal as the arena for all disputes (certain elements such as validity of notices are currently within the Court’s jurisdiction, and others, such as determination of premium are for the Tribunal).
Less onerous time constraints
The current legislation is full of time limits which often have repercussions for the leaseholder if missed, including deemed withdrawal of their claim and possible prohibitions on serving another claim notice. It is recommended that there be no restrictions on serving new notices if an initial notice were to be invalid (hopefully reducing the number of disputes about validity of notices, as presumably there may ultimately be little to gain from this). There are also dire consequences for landlords who fail to serve their counter-notices in time under the current law. The recommendations made intend to modify such consequences. One example is that if all terms have not been agreed within 6 months following Counter Notice (per the current law) and the tenant filed to make an application to the tribunal, the new proposals suggest the claim would no longer be automatically deemed withdrawn, but that the landlord would have to make an application to the tribunal to have the claim struck out, with a much longer long-stop date for a tenant’s claim to fall away. Additionally the landlord who fails to serve a counter notice may face less onerous consequences (but may face paying the tenants’ costs relating to his failure).
Costs and Premiums
There are controversial proposals for the current obligation on leaseholders to pay the landlord’s costs to be abolished.
There are of course also the separate proposals of the Law Commission relating to the valuation of the ‘premium’ (purchase price) payable for lease extensions and freehold acquisitions. These were the subject of an earlier report in January 2020.
When will this come in to effect?
It is important to remember that the Law Commission has reported to parliament on its recommendations for reform; it is now up to parliament to decide what proposals they might actually want to make into law; timescales for progression also remain with Parliament (and one might be forgiven for considering they have a number of other significant issues to contend with in the present circumstances). Even with a drive for reform it is likely that we would not see changes becoming law for perhaps 2-6 years, if not longer.
The future of leasehold home ownership…
The full scope of the reform proposals is outside the scope of this article. It should be remembered too that the subject of leasehold reform has been a contentious area for some time now and other reform is also afoot; the governmental ban on new leasehold houses, other bans on ‘onerous’ ground rents (or ground rents generally), proposals to ‘reinvigorate’ commonhold and review of the Right To Manage. It seems however the underlying message is clear; reform is needed to make our existing processes fairer (cheaper and easier) for owners of residential leasehold properties. Leasehold property and home ownership in the UK as we know it has some potentially very significantly change in the not so distant future.
If you require the assistance of one of our leasehold enfranchisement solicitors, please contact Laura Russell on 023 8082 0528. We have offices located in Bournemouth, Poole, Salisbury, Southampton, Winchester and London for your convenience.