Re-setting the calculation - One small step towards leasehold reformation

22 October 2018

Last year I wrote a short blog on Preparing for the results of the Consultation on ‘Leasehold’ Houses

Following that Consultation the UK Government, in December 2017, announced that it would ban the sale of houses on a leasehold basis and prohibit developers from selling leases of flats or houses that contain an obligation to pay ground rent.  The government is also committed to making it cheaper and easier for existing leaseholders to buy-out their freehold.  The Law Commission is considering three projects: 

1) simplifying leasehold enfranchisement rules;

2) reviewing ‘commonhold’ to make it a more attractive option; and

3) reviewing and amending the rights of tenants to take over management of their blocks.

Separate papers are expected to be published in respect of each of later this year.

In the first instance the Law Commission has prioritised enfranchisement solutions for existing leaseholders of houses and providing solutions prior to the summer recess.  In September 2018, a detailed Consultation Paper will be published setting out provisional proposals for a reformed enfranchisement regime.  However, an initial paper has just been released.

This initial paper acknowledges that currently the two systems; one for flats and the other for houses, is outdated and it is clear the government is proposing to make the procedure for each of them, as similar as possible, and much of the paper focuses on leasehold houses.   In respect of enfranchisement generally the principal change that is being proposed in respect of leaseholds is altering the method used to determine the price that tenants have to pay their landlords to enfranchise (or extend their leasehold).  Two options have been proposed:

Option 1:
The first option is a simple formula based approach to calculate the premium.  For example on ten times the ground rent or 10% of the value of the property. This would remove uncertainty about how a premium will be calculated, however, may create an arbitrary system, where those in high property value areas (such as London) are penalised if the premium is linked to the value of the Property, and may result in a higher premium.

Option 2:
The second option is to adopt an approach more akin to the current system, with a premium based on market value, removing the ‘marriage value’ concept and introducing prescribed standardised rates.

However, these options do not appear to resolve the inevitable issue that these proposals to ban ground rents on all new builds will create a two-tier property system for leaseholds, those with existing ground rents, and those with zeros grounds rents (which will arguably be more favourable, and valuable).  Merely relying on developers to provide ‘compensation funds’, is unlikely to be satisfactory across the board, and many caught by the two tier system will demand further changes to bring leaseholds into line together.

It remains to be seen just what the proposals will suggest however, a balance will need to be struck between the interests of the landlords with due and fair recompense to them for the loss of the freehold, with the interests of the tenants, with a clear and fair premium to pay to extend their lease or enfranchise, whilst at the same time minimising the impact of a two-tier leasehold market.

In addition to the recalculation of the ‘premium’ payable, the Law Commission is looking at the following potential changes:

  • Simplifying the enfranchisement process, making it easier to understand, in order to minimise disputes and avoid leaseholders falling into legal traps;
  • Removing the requirement that leaseholders must have owned the lease for two years prior to making a claim;
  • Introducing an alternative right to purchase unlimited, longer lease extensions without a ground rent, e.g. for a term of 125 or 250 years instead of the current 50 years (in respect of houses) and 90 years (in respect of flats);
  • Potentially arguing whether leaseholders should contribute at all to their landlord’s legal costs, and if not, capping the contribution at a fixed maximum amount.

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