Law Commission review of enfranchisement rights: a summary
The report “Leasehold Ownership”, follows a consultation (including a consultation paper and leaseholder survey) carried out between September 2018 and January 2019. In excess of 1,000 responses to the paper and 1,500 responses to the survey were received.
The following points represent a high-level summary of the Commission’s key recommendations for the proposed statutory regime which will govern the process of lease extensions and freehold acquisitions.
In the first Blundell lecture of 2020 “Making our homes our own: The Law Commission’s Reports on Residential Leasehold and Commonhold” Professor Nick Hopkins described how ownership of the value of property is a defining characteristic separating the ‘owner’ from the ‘renter’. He also explained that the Commission’s recommendations are “designed to mitigate the inherent difficulties [with the leasehold system] by as far as possible placing the financial value of homes in leaseholders’ hands.”
The recommendations put forward by the Law Commission are just that: recommendations. It may be some time before they are codified into law, however, there is an expectation that the work carried out by the Law Commission in this area will be implemented.
1. Right to lease extension
Leases of both leasehold flats and leasehold houses should be capable of being extended for 990 years (currently this is restricted to 50 years for a leasehold house and 90 years for a leasehold flat), at a peppercorn (zero ground rent) on payment of a premium. On this basis a lease will only need to be extended once and the majority of the value will be held by the tenant.
Parties will not be free to agree new terms for the extension lease. This is to ensure tenants are not prejudiced by uneven bargaining power. Other than term and ground rent the terms of the extended lease are to be the same as the existing lease unless there is a particular reason why a variation is necessary (for example alterations have been carried out to the premises). Disputes are to be referred to tribunal.
Landlords will have the right to obtain possession for redevelopment purposes within the last 12 months of the terms of the original lease or the last five years of each period of 90 years after commencement of the extended term. This is to ensure a landlord can obtain possession of all units within a building simultaneously and to ensure redevelopment is not frustrated.
A lease extension claim must only include premises which are in some way associated with the leaseholder’s home (this preserves the current legal position however there is a recommendation for archaic language such as ‘curtilage’ to be replaced with more accessible terminology).
Mortgages of leasehold flats are automatically transferred to an extended lease however mortgages of leasehold houses are not. The recommendation is that mortgages of leasehold houses should also automatically transfer to prevent delays to leasehold extension (requiring mortgagee approval).
Appurtenant property rights, whether granted by the landlord or a third party and whether or not granted in the lease or separately, should be automatically extended alongside an extension of the lease to which the right is appurtenant. For example, a right of access to leasehold premises will extend if the lease of that premises is extended to prevent loss of an essential right.
Tenants with very long leases will have the right to buy out the ground rent. This is to assist where leaseholders have high ground rents but no need to extend their term.
The Commission has recommended a government cap on ground rent in valuation of enfranchisement premises, if this recommendation is not accepted the Commission suggests that leaseholders should have the right to extend their term without buying out the ‘onerous’ ground rent.
The Commission has also published a report (in January 2020) which sets out further details around possible solutions which may assist tenants who are, for example, trapped in leases containing doubling ground rents. The Valuation Report addresses matters such as caps on how ground rent might be calculated when ground rents are enfranchised and how leaseholders with shorter term leases might benefit from calculations that take into account the principle of marriage value. It is important to note that this valuation Report does not contain the Commission’s recommendations and instead has responded to a Government request for valuation options (and sub-options) to be provided. It will be for the Government to consider those options and determine any implementation thereof as part of the overall package of reforms in this area.
2. Individual freehold acquisition
A leaseholder who owns all, or the only, unit(s) in a building will have the right to acquire the freehold. The premises that can be included in the freehold acquisition claim will not by default include all land demised by the existing lease. Where a leaseholder owns the only unit in the building but their demise does not include all parts of the building that tenant should be able to acquire the freehold of the whole of the building.
Leaseholders should inherit the existing property rights that affect the freehold property as at the date of their claim – this will include rights benefitting and burdening the freehold. The exception being that any rights burdening the freehold that do not bind the leaseholder’s lease on the relevant date will fall away, the intention being that the leaseholder should not be in a worse position on acquisition of the freehold (otherwise leaseholders may be dis-incentivised from exercising such right of acquisition).
The Commission recommends that “special rules” apply to situations including where the “freehold is held on trust or is settled land”, and where there is “an estate contract or option to purchase the freehold”. In these cases it is intended that such interests will not continue to affect the freehold once it is acquired by the leaseholder. It is recommended that entirely separate rules apply to mortgages.
As a general rule personal obligations of the landlord will not pass to the leaseholder on their acquisition of the freehold. However, the Law Commission acknowledges that in certain scenarios personal covenants are protected by chains of contracts for the purpose of protecting neighbouring land interests, in which case such rights should properly carry forward. The distinguishing factor appears to be the nature of the personal obligation – financial obligations being more likely to be governed by the general rule.
The creation of new personal obligations, which are solely for personal benefit rather than pertaining to land, will be restricted to a list prescribed by the Secretary of State. The Commission believes that a prescribed list will be possible “because of the limited categories of cases which would need to be included on it”. The recommendation that tenant and landlords should be able to select terms from the list is a result of comments of unfairness from some consultees. However, the overarching intention is to protect the leaseholder from obligations that might be improperly imposed to generate profit/income stream for the seller even after the sale of the freehold.
The creation of new property rights during the freehold acquisition process is to be limited (but not prohibited) in order to prevent the creation of obligations which generate profit or income for the landlord. Creation of legitimate rights, such as those required to protect amenity/value of the land acquired (and any retained land), are to be permitted.
The creation of such rights will need to satisfy a two-limbed test. The new right must:
- be an appurtenant right (a right over adjoining land under third party ownership), which will include any right amounting to an easement and ‘land obligations’ and will include both restrictive and positive covenants; and
- correspond to an existing right/obligation in the leaseholder’s lease (to prevent a continuation of arrangements contained in the lease and to prevent either party from benefitting from an entirely new right). The Commission, in this context, considers “obligations; to include such matters as are capable of protecting the character of land and enhancing its amenity or financial” (para 1.5 of Making Land Work: Easements, Covenants and Profits à Prendre (2011) Law Com No 327).
3. Collective freehold acquisition
Multiple leaseholders, acting together, should be able to exercise an enfranchisement right in respect of a broader range of property. The right is currently restricted to acquisition of the whole or part of a building that is self-contained. The new proposals would permit acquisition of the freehold of multiple buildings or parts of buildings (i.e. separate rather than self-contained). It is intended that this will offer a solution to difficulties that can arise on estates where part of the estate is hived-off into separate collective ownership resulting in competing or incongruous management across the wider estate.
To limit the legal and practical difficulties that arise from ownership of the freehold being split between numerous individuals (determination of beneficial ownership and daily management of the property are cited as examples) it is recommended that the purchasing entity is a corporate body with limited liability. The type of corporate body is not prescribed and although model constitutional documents would be made available to assist purchasers their use would not be mandated. On a successful acquisition the corporate purchaser is to be protected against a subsequent claim for a period of two years.
The general rules regarding transfer and creation of rights applicable to individual freehold acquisition will generally be applicable to collective freehold acquisition (see above).
As part of the “primary” freehold acquisition the leaseholders should be able to acquire:
- additional land that is let alongside the relevant residential units;
- land exclusively used by owners/occupier of the relevant residential units; and/or
- land over which rights are exercised by owners/occupiers of the relevant residential units on a non-exclusive basis (landlord or Tribunal consent required).
To significantly reduce the cost of the acquisition and to encourage participation in the collective acquisition, leaseholders should be able to compel landlords to take a leaseback of units which are let to those who are not joined into the collective acquisition) such as non-participatory and non-qualifying leaseholders.
4. Eligibility and cost
The Commission’s recommendations aim to widen the eligibility criteria therefore enabling more leaseholders to access rights of enfranchisement.
In direct response to consultee evidence the report suggests that leaseholders should have the right to collectively enfranchise where a building can be “fairly described as being residential”. Under current law if more than 25% of a building is used for non-residential purposes then leaseholders will not be able to collectively enfranchise – this is the case even where the majority of the building is used for residential purposes. The proposal is to increase this percentage to 50% to reduce the barrier to enfranchisement.
The Commission has also recommended that leaseholders should acquire an immediate right to enfranchise on acquiring their leasehold interest – therefore removing the current (arbitrary) requirement for the leaseholder to have owned the leasehold interest for at least 2 years (with the associated effect of decreasing their lease term by such period).
Eligibility criteria, defined by reference to use of premises and terms of leases will assist in determining which business leases and types of premises will qualify for enfranchisement rights and will extend the regime to premises such as “live/work units.”
In addition to modifying certain existing eligibility criteria the Commission recommends the abolition of a number of existing hurdles to enfranchisement including the:
- resident landlord exclusion: which treats a landlord who converts a building into flats and remains resident in a flat differently, in terms of enfranchisement rights, to a subsequent landlord who acquires the freehold block from the original resident landlord (this Commission finds that’s this “comprises a barrier to the exercise of freehold acquisition rights”);
- three or more flats rule: which excludes from collective enfranchisement rights a leaseholder who holds three or more flats within a building (the Commission does not believe this rule achieves its purpose of excluding “sophisticated investors” from the benefits of the regime); and
- low rent test/rateable value test: these categories of eligibility were referred to as causing “complexity and confusion” with the difficulty in ascertaining rateable values being identified as a particular issue.
If the premium for the acquisition is equivalent to market value then it is recommended that the acquiring party/parties should not be required to make payment of or towards the landlord’s costs. However, if the relevant premium is set below market value then it is recommended that the acquiring party/parties will contribute towards the landlord’s costs through a fixed costs regime.
5. Voluntary transactions/contracting out
To protect leaseholders from entering into transactions on onerous terms (being incentivised to do so by, for example, a reduced purchase price) the Commission recommends that the Government should consider regulating both lease extension and individual freehold acquisition transactions therefore preventing voluntary transactions being entered into which exist outside of the proposed statutory arrangements.
Extensions or transfers that do not comply with the statutory arrangements will remain valid and registrable at the Land Registry. However, the suggested manner of regulation will require approval of the terms by the Tribunal to ensure that the transaction is “objectively reasonable” (price being a factor of the assessment of reasonableness). The Commission also suggests that agreements which include provisions that seek to restrict the future enfranchisement rights of leaseholders should be deemed to be void.
To further protect leaseholders, the Commission recommends the following consequences for failures by the landlord to offer reasonable terms:
- where the term or ground rent under a lease extension is inconsistent with the statutory requirements terms will be implied to bring the terms in line with the statutory position;
- if a lease extension or an acquisition include obligations that do not confirm with the statutory position such obligations should be treated as being unenforceable; and
- the omission of terms or rights that should be included in the relevant transaction under the statutory regime should be rectified by the landlord by the inclusion/grant of the same in the new lease or transfer. If it is not possible for the landlord to do so they should be liable for the leaseholders’ losses arising from such omission.
The Commission does not recommend that such regulation is extended to collective freehold acquisitions, the main basis for this appears to be that there is a perception (whether correct or not) that there is safety in numbers and it will be more difficult for a landlord to take advantage of a group of leaseholders.