In a press release issued by the Housing Secretary on 7 January, the Government announced proposals to reform the current law on residential leasehold property in a number of key areas.
The Proposals
The announcement covers enfranchisement and, to a limited extent, Commonhold (and we are told that additional proposals are to follow). The plans include the following:
- Leaseholders of both flats and houses are to have the right to extend the term of their lease by a maximum of 990 years at zero ground rent; currently tenants of flats can extend their lease at a zero rent but for a maximum of 90 years, and tenants of houses are restricted to one extension of 50 years.
- A cap is to be introduced on ground rent payable when a leaseholder chooses to either extend or become the freeholder (although the figure is not specified).
- An online calculator is to be introduced to make it simpler for leaseholders to find out how much it will cost to buy the freehold or extend the lease.
- Marriage value is being abolished. This is the uplift in value that results from the leasehold and freehold being held together and has traditionally been included when calculating the premium for the extension.
- Leaseholders can voluntarily agree to a restriction on future development of their property in order to avoid having to pay a premium for " development value".
- Ground rents in leases of new retirement homes are to be limited to zero (a U-turn by the Government which had previously given a specific exemption for such properties).
As regards Commonhold, the Government has announced its proposal to set up a Commonhold Council made up of various leasehold stakeholders in order to increase interest in its take up. Additional details are to be published.
Why reform is necessary
In response to criticism of the enfranchisement process, the Government had asked the Law Commission to find a "simpler, easier, quicker and more cost effective " process and to examine the options to reduce the price payable by leaseholders to enfranchise. The Law Commission duly published its report in July 2020 on Leasehold Enfranchisement (with separate reports on Commonhold and Right to Manage) making 102 recommendations.
It had already published an earlier report on Leasehold Home Ownership-Options to Reduce the Price Payable (published January 2020), which considered various options for the basis of valuation, but it concluded that the ultimate decision was down to Government. It specifically looked at marriage value and set out 3 possibilities: retaining the concept of marriage value (which is currently included for extensions of leases of less than 80 years); replacing it with hope value, or abolishing marriage value entirely. By choosing now to remove marriage value entirely, and by including the calculator (a move recommended by the Law Commission) the Government is signalling its intention to reduce the premium payable and to help remove the uncertainty that arises in valuation negotiations.
However, the Government announcement is thin on details of how the calculation of the premium will work. Although we are told that the current discount for tenant improvements will be allowed, it is not clear whether the other variables identified in the January Report will be included.
Similarly, the Law Commission had made many other recommendations (for example removal of the requirement that a leaseholder had owned its lease for 2 years before being able to extend their lease, and allowing flat owners to buy the freehold of a block where up to 50% of the building is commercial space) which are not covered by the Government statement.
In particular, not dealing with the 2-year ownership requirement is surprising, as it was an uncontentious proposal to remove an unnecessary complication that would have represented an easy win for the Government.
In the January report, the Law Commission was careful to emphasise that the opinion of independent Counsel had been taken to assess the compatibility of proposed changes to the enfranchisement regime with human rights legislation and, as the Commission reported, " any options for reform that would reduce the premium must be tested for their compatibility with Article 1 of the First Protocol of the European Convention on Human Rights".
We will have to wait to see the draft legislation to be able to assess whether the reforms meet the test but with so much at stake, a challenge being brought by landlords on this basis cannot be ruled out.
The Timing
The Government has confirmed its intention to introduce legislation to set ground rents to zero in future leases in the upcoming session of parliament. No timetable is given for the introduction of the other measures proposed.
The only indication in the statement of when any changes will take effect is in relation to the retirement homes as to which the Government has, forestalling developer concerns, announced that they will not take effect until 12 months after Royal Assent.
To some extent, the statement has raised many more questions than it has answered. We will have to wait to see the draft legislation to understand which of the Law Commissions' Recommendations are being adopted and we look forward to seeing the detail with interest.
If you have any queries about lease extensions, enfranchisement, service charge disputes, or any other residential landlord and tenant matters please contact Amanda McNeil or Robert Boucher
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