The Law Commission have today published their long-awaited report into the legal aspects of the proposed reforms for the law in this area.
The Commonhold Leasehold Reform Act 2002 was the last big legislative foray into reform in this area, which came into force in 2003.
Bearing in mind the non-neutral terms of reference that the Law Commission were given the proposals seek to redress the balance between landlords and tenants and show a big change of emphasis towards the tenant’s side of the equation.
There are also two other reports on the Right to Manage and Commonhold. I have set out below a short summary of the key enfranchisement changes from Law Commission’s document together with some short initial comments. The main report runs to 859 pages! So, there is plenty more to read and digest in the days and weeks ahead.
So, what is the ‘leasehold reform news?’
If the proposed reforms were to be enacted as the Law Commission propose here is what the new world might look like for both lease extensions and collective enfranchisement:
No two-year wait.
There would be no requirement to have owned the property for at least two years to qualify for a lease extension.
Immediate transfer on assignment
The right to extend would automatically transfer with the property so that if the seller had started a claim the buyer would automatically pick it up and there would be no questions about whether it had been validly assigned. There would be a right for the buyer to elect NOT to take on the claim, but this would have to be actively exercised by the purchaser. This would make transferring claims much easier and less risky.
Plus 990 not plus 90 year lease extensions
Lease extensions will now be for a term of 990 years, not plus 90, but plus 990. A big shift meaning that this will only need to be done once in the lifetime of a lease. The lease will be at a peppercorn (zero) ground rent thereby taking out all of the freeholder’s value when the lease completes. The terms of the new lease will be controlled (as they are now) but the starting point will be the existing lease (similar to now) but with less scope for a complete redraft of the new lease – the paper envisages that the old lease will be annexed and that all lease extensions will be by supplemental deeds where possible.
Don’t like your ground rent? Then buy it out
There are many cases where a lease has a rising rent and in particular those affected adversely by the leasehold scandal have rents that double at unacceptably short intervals – such as 10 or 5 years or other rents that make the property harder to sell or re-mortgage. There will be a new right if the lease is long (more than 250 years) to buy out the ground rent alone – rather than having to carry out a lease extension when one is not really needed just to get around this problem.
BUYING THE FREEHOLD
No more flats and houses – just Units
Firstly – an end to the distinction between flats and houses – just one single enfranchisement right – the debate will not be about ‘what is a house?’ And the thinking is that ‘what is a unit’ will be a shorter and easier debate.
25% is now 50% if you have a mixed-use building
Secondly – there will be an increased right to buy the freehold – if there is a non-residential element – no more 25% or more non-residential use but instead 50%. This would bring loads more buildings into the scope of enfranchisement. There might well be issues around cost and funding etc. as commercial spaces are expensive, but this will no doubt be welcomed by tenants and met with concern by the commercial property industry and its investment arms.
An estate enfranchisement right
There will be a right for groups of more than one building to come together to make enfranchisement claims in common areas. This targets modern developments and much to the relief no doubt of the Great Estates would not allow the purchase of the freehold to a more disparate or mixed portfolio but would allow connected parts of buildings or developments to buy their freeholds at the same time.
Leasebacks for landlords – mandatory
Part of the overriding objective of the proposed reforms is the requirement from government to make it ‘cheaper and easier’ to enfranchise. Therefore, the landlord will be compelled to take a ‘leaseback’ (a 999 year lease at a peppercorn lease) of areas that are not subject to a long lease and also in the case of leaseholders who are not participating in the claim. This would reduce the overall amount that the enfranchising tenants would have to pay to buy their freehold. This is contentious as it would prevent leaseholders ‘investing’ in their own claims and would also deter ‘white knight’ funding. It would also make landlords the owners of reversionary interests in their own former buildings with no say in their management.
A single procedure – and easier notices
This has to be welcomed as harmonising the 1993 and 1967 Act regimes will make enfranchisement much more accessible. However, the reforms go further and the adversarial approach to notices would be removed. Effectively notices will be a prescribed form and the burden on the landlord will be greater. For instance the landlord will need to serve other parties who should be notified – such as management companies and also intermediate landlords. The notice will also have to have a draft lease or transfer attached to it.
Less time limits – and the tribunal’s role changed
It is proposed that the tribunal would be able to determine any minor disputes about notices – effectively whether they are valid or not, thereby ending the County Court’s jurisdiction over this. In addition, serving counter notice would still be required within the 2 month time frame, but the consequences of not doing so would be less fatal. A landlord could apply to the tribunal and if the case had not already been determined make representations as to the price they should receive. However, they would have to pay any costs incurred by the other parties.
The general position on time limits and notices would be changed so that the tenant would still need to make an application to the tribunal once 6 months have elapsed after counter notice had been served, but that not to do so would not make the claim withdrawn. Instead, the landlord would first have to make an application to the tribunal for the claim to be struck out. This would be notified to the tenant giving them a chance to remedy the position.
There would be an absolute time bar of two years from the date after which a claim notice was served after which it would lapse if no action was taken on it. This would make it easier for tenants to avoid a number of the time traps that currently exist and can be fatal to their claim. In addition, if a claim were to be invalid there will be no restriction on serving a further notice straight away.
AND ANYTHING ELSE..?
No more costs?
In a move that will be seen as contentious and a reversal of the ‘standard’ position that the tenant pays the landlord’s costs, as reflected in the legislation, there are moves to remove or severely limit the ability of the landlord to recover any costs for the tenant. The Law Commission say that if the government chooses to apply reforms that compensate at ‘market value’ that the landlord should not be able to recover any costs at all from the tenant. This is a massive shift from the current position where the tenant has to pay the landlord’s non-litigation costs subject to a statutory requirement of ‘reasonableness.’
Deals outside the act?
These will still be possible, and these were in fact outside the scope of the Law Commission’s report. However, they do indicate that they believe that government should move to regulate these so as to impose controls on the sorts of terms that can be agreed on a ‘voluntary’ basis.
What about valuation reform?
Don’t forget that this is just the paper on enfranchisement. Running to some 859 pages it is a ripping read. This volume says nothing of the options for reforming the law on valuation which were the subject of a previous paper.
The objective expressed in that paper is also to make it ‘cheaper and easier’ – in other words to drive down cost. The options that government will have to look at there are as prepared by the Law Commission on 9th January. For further information on this see the summary note that appears at Leasehold Reform News
What does all this mean? Well, it shows the direction of travel and of course this report would have to be turned into law by a future parliament. That itself could take some time and might indeed not happen, or the changes might be quite different once parliament has had their hands on them.
However, this all has to be seen in the context of a set of wider proposed changes – banning the creation of new leasehold houses, and separate government proposals to ban ground rent for new leases. There is an agenda of change and there will be a lot of work to do on the detail of this, but this report does set the agenda for a big sea change in this area.
However, it is quite likely to be a good 3-5 years before any of these recommendations might become law, as this depends on parliamentary time and inclination and as we all know government has quite a few other things on its hands at the moment in addition to leasehold reforms.
A lot to digest, but interesting times ahead in leasehold – watch this space!
The above is accurate as at 21 July 2020. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.