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What does the Law Commission's report mean for leasehold reform?

  1. 30 January 2020
  2. By Daisy Stephens

The Law Commission, one of the leading voices for leasehold reform, recently published its much-anticipated report setting out options for the government to cut the price payable by leaseholders to buy the freehold or extend the lease of their homes.


Image courtesy of DepositPhotos

The report, entitled ‘Leasehold home ownership: buying your freehold or extending your lease’, followed on from the Commission’s Consultation Paper in 2018 on leasehold enfranchisement reform, which made provisional proposals for reform designed to ‘provide a new scheme of qualifying criteria for enfranchisement rights, enhance and improve the enfranchisement rights themselves, and provide a new unified procedure for all claims’.

What did the report say?

The report outlined three alternative schemes ‘for determining the premium’, which would make enfranchisement cheaper and in turn save leaseholders of houses and flats money, whilst also ensuring that enough compensation is paid to landlords to reflect their legitimate property interests.

Each scheme put forward by the Commission uses a different basis to determine the price of enfranchisement, and also aims to accelerate further reforms to both make the process simpler and reduce uncertainty.

Alongside the three schemes, the Commission suggested a range of further options for reform, including:
  • prescribing the rates used in calculating the price, to remove a key source of disputes, and make the process simpler, more certain and predictable;
  • helping leaseholders with onerous ground rents, by capping the level of ground rent used to calculate the premium;
  • the creation of an online calculator for determining the premium to make it easier to find out the cost of enfranchisement, and reduce uncertainty around the process;
  • and lastly enabling leaseholders who are collectively enfranchising a block of flats to avoid paying ‘development value’ to the landlord unless and until they actually carry out further development.
The Commission argues that, as well as reducing the price of buying a lease, these recommendations could clarify and simplify the law and ensure the process of leasehold enfranchisement is easier and cheaper to operate.
 
Additionally, the report describes the limited role that simple formulae – for example a multiple of ground rent – could play in delivering reforms, while explaining that their wider use is not possible under the UK’s human rights laws.
 
The report, however, did not offer up a view on which scheme and which options for reform should be adopted, with the Commission believing this is ultimately for government and parliament to decide. But the organisation said it will be making recommendations in the coming months for reforms to improve all other parts of the currently complex enfranchisement system. This includes helping those who qualify for enfranchisement rights and improving the procedure that must be followed in order to exercise those rights.
 
Leasehold reform appeared in the Conservative manifesto before the general election in mid-December, and after the Tories emphatic win – which gave them an 80-seat majority in the House of Commons – it was also mentioned in the government’s Queen’s Speech.
 
In that speech, which sets out the government’s planned agenda for the next Parliament, a firm commitment was made to take forward a comprehensive programme of reform to end unfair practices in the leasehold market, including working with the Law Commission to make buying a freehold or extending a lease easier, quicker and more cost-effective, in addition to reinvigorating commonhold and Right to Manage.
 
The Commission says it’s continuing to finalise its recommendations for reforming all other aspects of the enfranchisement regime and aims to report on those issues in spring this year.
 
You can read the full report here.

How was the report received?

Mark Steggles, partner at law firm Thomson Snell & Passmore, said the potential abolition of marriage value (the rise in value that occurs where a tenant purchases the freehold) is the proposed reform most likely to concern landlords, as it would lower the value of the premiums payable by the tenants.
 
“However, this proposed reform, together with the proposed introduction of prescribed rates for calculating premiums and a suggested route for capping the impact of ground rent escalators that are causing such controversy at the moment, are likely to be warmly received by leaseholders,” he added.
 
Mary-Anne Bowring, group managing director at property consultancy Ringley, said: “While these reforms would save leaseholders money, the erosion of the benefits of being a freeholder would likely see an increase in non-professionally managed blocks, absentee freeholders and other court processes.”
  
She added: “However, there may be additional upsides for leaseholders by removing the ability of unscrupulous freeholders or their agents to put pressure on leaseholders by refusing to negotiate until the 11th hour in order to extract more money than would be reasonably expected.”

Meanwhile, the Association of Leasehold Enfranchisement Practitioners (ALEP) said the Law Commission’s recommendations set the tone for fairer enfranchisement valuation legislation but added that there was still room for improvement.

By contrast, The Leasehold Solutions Group lambasted the Commission’s report, arguing that it unfairly favours freeholders' interests and does not go far enough to make enfranchisement cheaper for leaseholders.

Louie Burns, managing director of The Leasehold Solutions Group, said: “The recommendations in the report are incredibly underwhelming. However, my real concern is that the document repeatedly defends the freeholders’ human right to own and profit from someone else’s property via the leasehold system, which is absolutely crushing.”  

He continued: “Rather than recognise leasehold as an exploitative feudal anachronism, the Law Commission seems intent to defend the principles of the system, rejecting many options for reform that would make enfranchisement genuinely cheaper, simpler and fairer. For example, the option to calculate the cost of enfranchisement by a simple multiplication of the current ground rent was dismissed by the Law Commission as it would contravene human rights legislation.”  

How likely is leasehold reform?

The government’s 80-seat majority means that they should now be able to pass most legislation through with relative ease and little opposition, something which wasn’t the case for much of Theresa May’s reign and the first few months of Boris Johnson’s tenure.

There has also been relative stability at the Ministry of Housing, Communities and Local Government (MHCLG), with Housing Secretary Robert Jenrick and Housing Minister Esther McVey both staying in situ since the general election – although a proposed reshuffle in February could threaten this.

What’s more, there is general backing for leasehold reform – from the public and politicians – which could help to speed things through, even if it isn’t as much of a priority to the government as abolishing section 21, bringing in mandatory electrical checks on rented homes, and making homes more affordable for buyers and sellers.

Since we first wrote about the leasehold scandal and the government’s plans for reform in October 2018, progress has been frustratingly slow.

After the leasehold scandal first came to light in 2017, the government took several steps to tackle and prevent leasehold abuses. The consultation paper, ‘Tackling unfair practices in the leasehold market’, which closed on 19 September 2017, marked the government’s first step in fulfilling a commitment to ‘improve consumer choice and fairness in leasehold’. Amongst other things, the paper included plans to tackle the sale of new-build houses on a leasehold basis and to control ground rent levels in new lease agreements.

The government published its response in December 2017, with the then Communities Secretary Sajid Javid committing to stamping out leasehold abuses.

Specifically, the 2017 government said it would:
  • legislate to prohibit the creation of new residential long leases on houses, whether newly built or on existing freehold houses, other than in exceptional circumstances;
  • restrict ground rents in newly established leases of houses and flats to a peppercorn value;
  • address loopholes to improve transparency and fairness for leaseholders and freeholders;
  • and work with the Law Commission to support existing leaseholders by making acquiring a freehold or extending a lease ‘easier, faster, fairer and cheaper’.
The aim was to bring forward solutions by summer recess 2018 and then to legislate as soon as Parliamentary time allowed for it, but the divisions of the May government and Brexit troubles put most domestic matters on hold.
 
The 2017 government published a further consultation paper, ‘Implementing reforms to the leasehold system in England’ – which ran from 15 October 2018 to 26 November 2018, with the outcome published in June 2019.
 
Again, the paper stated that the government would bring forward legislation as soon as Parliamentary time allowed for it to enact these measures, which were specifically: legislation to ensure that unless there are exceptional circumstances, all new houses would be sold on a freehold basis; and that ground rents on future leases would be reduced to a peppercorn of £0, meaning leaseholders would no longer be charged a financial sum for which they receive no material benefit.
 
Housing Minister Ester McVey confirmed the Johnson government’s intention to take forward these measures in a Written Statement on 31 October 2019, the Conservative manifesto 2019 contained a pledge to ‘continue with our reforms to leasehold’, and the Queen’s Speech reiterated the government’s commitment to leasehold reform and working with the Law Commission.
 
With the Brexit logjam now cleared (we will be leaving the EU on 31 January 2020), there should be no excuses when it comes to Parliamentary time and, with an 80-seat majority, the government should have no issue in getting anything through.
 
A healthy dose of cynicism is probably warranted, given the government’s failure since 2017 to actually introduce anything concrete, but genuine leasehold reform now seems more likely than ever – with the Law Commission set to play a key role in it.
 

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