Social Housing Speed Read – Law Commission Consultation Paper: the law of leasehold enfranchisement

Leasehold enfranchisement – a brief overview

As you will be aware, there are significant differences between owning the freehold of a property – which lasts indefinitely, until you decide to dispose of the land – and the leasehold, which provides ownership for a specific time period.

Leasehold interests are therefore commonly regarded as wasting assets; their value reduces as the term of the lease reduces. Tenants also tend to have a lesser degree of control over their property, as many decisions relating to the property can only be made with the landlord’s consent.

In an attempt to lessen the negative effect of these features of a lease, legislation has been enacted to grant tenants enfranchisement rights, namely:

• The right to a lease extension = this provides the tenant with a right to extend their lease for a further 90 years, in addition to the years left on their current lease. No ground rent is payable for this, although the landlord can demand a premium for the lease extension, calculated by reference to a statutory formula.
• The right to purchase their freehold = leaseholders of houses can purchase the freehold of a house, whilst leaseholders of flats are able to purchase the freehold of their block of flats, along with other leaseholders in the building.

A lease extension alleviates the issue of a tenant’s interest being a wasting asset, as they have reassurance that their investment in the property is secure during their lifetime. The right to purchase a freehold shares this benefit, and additionally allows leaseholders to obtain control over their property.

Current law and criticism

Whilst it is reassuring that such rights exist, the law of enfranchisement is currently pieced together by reference to over 50 pieces of legislation. The law is complex and contains many outdated terms and very technical provisions. Therefore, many tenants it difficult to ascertain whether they qualify for leasehold enfranchisement rights, and to further navigate the law, without obtaining legal advice.

Key proposals

The Commission have asked for responses on 135 questions, inviting respondents to offer their opinions on their provisional proposals.

The Commission aim to modernise the leasehold enfranchisement regime, and make it more streamlined, transparent and cost-effective. Some of the key proposals are:

“Residential unit”
Removing the current division between houses and flats with regard to the question of availability of enfranchisement rights, and replacing this with a single set of criteria which refers to a “residential unit”, which applies to any leasehold premises.

Minimum ownership requirement
Removing the current minimum ownership requirement that requires the leaseholder to have owned the lease for at least two years.

Low rent test
In certain circumstances, a “low rent test” must be met to qualify for leasehold enfranchisement rights. The test references historic “rateable values”, which are difficult to calculate and do not exist in relation to some properties.

The Commission proposes to abolish the low rent test in all circumstances.

Valuation
The Commission propose creating a simpler, clearer and consistent valuation methodology, and have suggested two options:

• Adopting a simple formula; either using a ground rent multiplier (where the premium paid is a multiple of the ground rent) or a percentage of the capital value of the property.
• A formula combining components of the existing valuation methodology in different ways. The Government will determine what those components will be, as their inclusion or non-inclusion will affect the calculation of premiums.

Final comment

The simplified right to extend the leasehold will be of particular interest to leaseholders of social landlords  holding a lease that has 80 or less years to run. It is at that point that banks are unwilling to take such properties as security.

Social landlords will welcome streamlined and refined leasehold enfranchisement legislation; the proposed amendments will make the regime easier to navigate when they are approached by a tenant wishing to exercise enfranchisement rights. We eagerly relate the publication of the responses to the Consultation Paper, and in the interim we encourage our clients to offer their opinions on the proposals.

Click here to complete the response form.

Click here to view the full Consultation Paper.

If you have any questions on the above and how it will affect social housing providers, or any other questions as a social housing provider, please do not hesitate to contact John Murray or a member of our expert Social Housing Team.