A new dawn for enfranchisement?

Proposals for the reform of leasehold enfranchisement were published by the Law Commission in September last year and an extended consultation period closed in early January 2019. Interestingly, the consultation paper is of not dissimilar length to the Brexit withdrawal agreement, running to some 500 pages, albeit generating less excitement except amongst enfranchisement professionals.

The Government estimates that leasehold property makes up 18% of all residential housing, with a significant amount of this based in London; as such these proposals are designed to deliver "a better deal for leaseholders as consumers."

They contemplate a wholesale overhaul of enfranchisement legislation on the basis this is deemed unnecessarily complex and costly. It's an ambitious project, seeking to simplify legislation that is the product of a number of Acts of Parliament totalling over 450 pages of legislation and which has developed piecemeal over many years.

Most significantly, there are competing interests at stake here between leaseholder and landlord, specifically in relation to the financial implications of any changes to be made to the valuation basis in determining premiums. It is this question of whether premiums should be reduced across the board that is the most controversial aspect of the paper.

Overview

The backdrop is of course the Government's stated priority to improve and facilitate home ownership. These reforms are part of a wider package of measures introducing change to the leasehold market, including the ban of sales of houses on a leasehold basis and the reservation of high and escalating ground rents.

The main stated policy objectives for the reform of the enfranchisement process are simple:

• to promote transparency and fairness
• to provide a better deal for leaseholders as the consumer
• to simplify enfranchisement legislation and
• to make enfranchisement easier, quicker and more cost effective
• to examine options to reduce the premium payable whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate interests.

Some of the key proposals for the simplification of the procedural aspects are as follows:

• the removal of so-called "barriers to enfranchisement" including the low rent test and the two year ownership requirement
• replacement of the complex categorisation of "houses" and "flats" and the introduction of a new concept of a "residential unit" for which there would be a universal right to lease extension
• the introduction of prescribed forms, deemed service provisions and more limited grounds for challenging the validity of a claim
• claims not to be deemed withdrawn
• the benefit of a leaseholder's notice to be automatically assigned on any sale of the lease to a third party; inadvertent errors in properly assigning a claim notice to a third-party purchaser would no longer result in claims failing and leaseholders having to pay their landlord's costs
• a new right for leaseholders who did not participate in a previous collective enfranchisement to do so at a later date
• a right for leaseholders to acquire the freehold of an estate collectively.

Options for valuation methodology

The paper acknowledges that a leaseholder's costs are two-fold and comprise not only the price to be paid for the extended lease or freehold but also professional costs, namely fees paid to lawyers and valuers.

Part of the case for making the enfranchisement process easier and quicker is the reduction in professional fees that this should achieve but the question of whether premiums should be reduced is a more contentious one, involving political judgement as well as valuation and legal considerations.

There are many criticisms of the current approach to valuation, the main one being that it is complicated and expensive, not readily understandable to a lay person and that the methodology is difficult to apply without specialist advice.

This is particularly an issue where the capital value is low and therefore professional fees can become disproportionate to the price payable. One proposal is for a differentiated calculation method depending on whether depending on whether the enfranchised right is being exercised by a home owner or an investor.

The paper sets out two options for altering the method used to determine a premium.

The first option is a simple formula based approach so, for example, a multiple of the annual ground rent or a percentage of the value of the property. This would remove uncertainty as to how a premium is calculated but would obviously create a somewhat arbitrary system.

Option two would be similar to the current system with a premium based on market value but removing the marriage value concept with prescribed, standardised rates being introduced.

A balance will need to be struck between the interests of landlords for the loss of the freehold and the interest of the leaseholder in having a fair and transparent system for determining the premium it must pay. Landlords will want to ensure that there is sufficient compensation provided to them and to avoid the process becoming over simplified.

It's fair to say that leaseholders have purchased their properties and landlords their reversionary interests based on the current valuation system and taking into account the risk factors within that system.

A radical overhaul of the system will inevitably involve some detriment to one of the parties and the Law Commission acknowledges that the options required by the Terms of Reference for its consultation paper would benefit leaseholders at the expense of landlords.

What does this mean for leaseholders and landlords?

At the moment, this is very much a watch and wait scenario for all those potentially affected by these proposed reforms, be they a leaseholder or a landlord. It is likely to be some months yet before the response to the consultation is published.

Leaseholders who have been contemplating extending their leases may wish to wait to see to what extent these proposals find their way onto the statute book before they make a claim but whether this makes commercial sense will depend on the unexpired term of their current lease and whether a wait of a year or so is critical due to this or other factors.

Landlords may be a little less robust in their negotiations on premiums to ensure that any existing claims do not get derailed on the back of these potential reforms with leaseholders perhaps having one eye on withdrawing from the process and taking the hit on professional fees in the expectation of paying a lower premium if they make a fresh claim in a year or two's time.