On 9th January 2020, the Law Commission for England and Wales published their greatly anticipated report on leasehold enfranchisement valuation reform. The report proposes options to reduce the premiums that leaseholders must pay in order to buy the freehold or extend the lease on their homes. Such transactions are referred to as “enfranchisement”.
Enfranchisement is a legal right provided to leaseholders under the Leasehold Reform Housing and Urban Development Act 1993. It applies to leaseholders of both houses and flats and is subject to strict qualification criteria. Leaseholders typically qualify for a lease extension if they have an original lease term of more than 21 years and have held the lease for the past two years.
Similarly, when a leaseholder wishes to purchase the freehold to their house, they will be required to have an original lease term of more than 21 years, which they have held for the past two years. Whereas the property must be reasonably considered a house, divided vertically from any adjoining house. Conversely, in instances where a leaseholder of a flat seeks to acquire the freehold, things work a little differently.
Leaseholders of flats are required to come together to collectively purchase the freehold to the entire building. This is known as “Collective Enfranchisement”. In order to qualify, leaseholders must not own more than two flats in the building and must have a long lease term of at least 21 years.
The property, on the other hand, must contain at least two flats, with two-thirds of the flats being owned by qualifying tenants (leaseholders) and no more than 25% of the building can be in non-residential use. If these qualification criteria are satisfied, the leaseholder(s) can proceed with enfranchisement in return for a premium payable to the freeholder.
However, the current enfranchisement procedure and valuation process are largely unregulated. As a result, many freeholders have taken advantage by charging astronomical premiums, far beyond what would be deemed as reasonable compensation. This is an indisputably unfair practice for any leaseholder to endure but even more so for those leaseholders trapped in onerous lease contracts.
With extortionate doubling ground rent clauses and hefty permission fees, such leases have left homeowners stuck in unsellable properties. Consequently, this leasehold scandal has also been the subject of an ongoing government investigation, with reform expected imminently. Nevertheless, in their current diabolical situation, it’s no wonder that many leaseholders are desperate to enfranchise in order to gain control of their property.
In response to the outcry from leaseholders and other members of the public, the government asked the Law Commission to review the law of Leasehold enfranchisement. Aiming to, “promote transparency and fairness in the residential leasehold sector and provide a better deal for leaseholders”[1], their report sets out “options” for reforming the valuation process.
Three key schemes have been identified by the Law Commission, which they believe will reduce enfranchisement premiums. And not only will the proposed options help to save leaseholders’ money but they should also make the process much easier and reduce uncertainty. Each scheme uses a different basis to determine the premium payable and allows for further reforms.
These further reform proposals include the following;
- Prescribing the rates used to calculate the premium payable and creating an online calculator to determine the premium payable – removing a key source of disputes in enfranchisement.
- Capping the level of ground rent used to calculate the premium to help leaseholders with onerous ground rent terms.
- Allowing leaseholders who wish to collectively enfranchise to avoid paying development value to the freeholder.
- Introducing pricing for different types of leaseholder so that owner-occupiers benefit from a reduction in premium, but investors do not
- Discounts for leaseholders’ improvements where any increase in the value of the property which is a direct result of an improvement carried out by the leaseholder can be discounted from the freehold value.
The full report and breakdown of each scheme can be read on the Law Commission’s website.
What happens next?
The Law Commission’s report will be reviewed by the government in order to determine how enfranchisement premiums should be calculated. However, a date has not yet been proposed for when we can expect any such reform to be implemented. In the meantime, the Law Commission is continuing to produce proposals relating to other aspects of leasehold reform.
One particular area under review is the qualifying criteria for enfranchisement, discussed earlier. We’re predicting that eligibility will be relaxed so that a leaseholder can enfranchise without having to wait two years. Furthermore, as a result of this highly welcome leasehold reform, freeholders may start to see a reduction in the value of their freehold interest.
Learn more about enfranchisement here.
[1] Law Commission (9th January 2020) https://www.lawcom.gov.uk/options-for-reforming-valuation-in-leasehold-enfranchisement-published-by-law-commission/
