Leasehold enfranchisement – Government announce major changes to the law

The Law Commission recently recommended to the Government various changes to the current law on freehold purchases and lease extensions in respect of leasehold flats and houses (known as leasehold enfranchisement) in order to reduce the price payable by tenants and make the enfranchisement process fairer and simpler.

The Government took its first step towards implementing the Law Commission recommendations by announcing on 7 January 2021 that both house and flat leaseholders will, under new law, be able to extend their lease to a new standard 990 years with zero ground rent payable.

The Government aims to make leasehold enfranchisement cheaper and simpler for the millions of leaseholders across the country, and ultimately to change our system of home ownership to allow homeowners to own their property on a freehold basis, giving them greater control over costs, owning and managing blocks and estates jointly with other homeowners.

What are the proposed measures to make leasehold enfranchisement cheaper and easier for leaseholders?

Below we set out the future measures likely to be taken to achieve these aims:

• A universal online calculator for tenants to establish the likely premium payable for either extending their lease or buying the freehold.
• Simplifying the valuation process for calculating the premium payable for the lease extension or freehold purchase and making the calculation fairer to tenants by:
  • setting prescribed rates that valuers acting for landlords and tenants must use when calculating premiums;
  • removing the requirement for the tenant to pay the landlord any “marriage value” (i.e. the increase in property value when one person holds both the leasehold and freehold interest rather than holding the leasehold interest only) significantly reducing the premium payable. 50% of the marriage value is currently payable by the tenant as part of the calculated premium when the lease has 80 years or less of its term left to run; and
  • enabling the tenant to agree to a restriction in their new lease/transfer on future development of their property rather than pay the landlord “development value” as part of the premium payable.
• All new leases of flats and houses (including retirement properties) to have zero ground rent payable.

In addition, various other proposals were made by the Law Commission and we should hear more from the Government on these at a later stage, including:

• a new right for leaseholders to “buy out” the ground rent under their lease without also having to extend the lease term;
• removing the requirement for leaseholders to have owned their leases for two years before exercising enfranchisement rights (for lease extensions and house freehold purchases) and allowing leaseholders to buy the freehold of a block where up to 50% of the building is commercial space (the current limit is 25%);
• making it easier and cheaper for leaseholders to enfranchise by providing for groups of flat owners to acquire multiple buildings in one claim and allowing leaseholders to require landlords to take “leasebacks” of units within the building which are not let to leaseholders participating in the claim;
• ensuring that a leaseholder is protected against the imposition of onerous or unreasonable obligations on acquisition of the freehold title;
• replacing the various procedures for making enfranchisement claims with one, streamlined procedure;
• providing that all enfranchisement disputes and issues should be decided by the Tribunal (rather than a court);
• eliminating or controlling leaseholders’ liability to pay their landlord’s costs, in place of the current requirement for leaseholders to pay their landlord’s uncapped costs, which can equal or exceed the enfranchisement price;
• helping leaseholders with onerous ground rents, by capping the level of ground rent used to calculate the premium; and
• enabling leaseholders who are collectively enfranchising a block of flats to avoid paying “development value” to the landlord unless and until they actually undertake further development.

The Government will also seek to promote commonhold as an alternative to leasehold and further legislation will follow to facilitate this, including the formation of a Commonhold Council which will comprise of a partnership of leasehold groups, industry and Government.

The timetable for the changes to take effect as new law is unclear and there is still uncertainty as to the precise changes that will be made. It is expected that the legislation will be brought forward to the upcoming session of Parliament to set future ground rents to zero, and the other recommendations are expected to take effect in the months or years thereafter.

For further information, or advice on matters relating to leasehold enfranchisement, please contact a member of the Enfranchisement team or visit our website page on lease extensions to see how we can help you.