Law Commission’s proposals on enfranchisement

The Law Commission’s long awaited reports on the future of residential leasehold were published late last month.  The big news is a significant push towards making commonhold the predominant form of ownership for flats going forward.  Our summary of the overall approach can be found here and links to more detailed notes on commonhold here and Right to Manage here.

Whilst the Law Commission is pushing strongly for commonhold in the future, they have sought to follow their brief from Government by making recommendations for a “better deal for leaseholders as consumers” in the meantime.  It is important to keep this context in mind when considering the proposed changes to the existing regimes governing the purchasing of freeholds and extending leases, otherwise known as enfranchisement.

The biggest potential change to the enfranchisement regime was set out in a separate report issued by the Law Commission in January which set out potential changes to the valuation of freehold purchases and lease extensions.  You can find our summary here and it is clear the Government will have some important political decisions to make before any of these proposals make it onto the statute books.  The same applies to their more recent trio of reports which could take many years to become law, if indeed all of the recommendations get that far, but there does appear to be cross-party support for re-defining home ownership.

There are 102 recommendations across the 860 pages of the most recent paper entitled Leasehold home ownership: buying your freehold or extending your lease.  They relate largely to the qualification criteria for enfranchisement and the procedures to be followed.  The Law Commission rightly note that there are currently different regimes in relation to houses and flats with qualification criteria and procedure set out in various acts of Parliament from 1967 to the current day.  As a result the overarching proposal is for a single simplified procedure covering both houses and flats.  Based on the guidance from Government the stated aim is to make it easier and cheaper to either buy a freehold or extend a lease.  Whilst there is a huge amount of ground covered in the report, it can broadly be broken down into four headings: 

The enfranchisement right

There are various recommendations relating to the extent of the property to be included in the new lease or freehold claim as well as the rights that will go with them.  The most notable is a new right called ‘multi-building collective freehold acquisition’.  This was originally designed to enable the tenants of several buildings on a modern housing estate to join together and buy the freehold of the whole estate.  Unfortunately the Law Commission decided not to provide any definition of ‘estate’ for these purposes and so have left room for considerable uncertainty which could give rise to unintended consequences. 

The remaining headlines here relate to lease extensions:

• there will be a right to a 990 year lease extension for both houses and flats
• the terms of the new lease will be more closely controlled than they are currently
• tenants of leases over 250 years will be able to buy out their ground rent without extending the term

Qualification for enfranchisement

As you might expect there is a fair amount under this heading as the Law Commission proposes the removal of certain barriers to qualification and also seeks to bring more buildings within the ambit of enfranchisement.  The most important points to note are:

• there will no longer be a distinction between flats and houses as there will be one global definition of ‘residential unit’. Whilst this is likely to expand the number of properties to which the new enfranchisement rights would apply it is likely to give rise to litigation regarding the new definition
• the removal of both the two year ownership test for all properties and the bar on a tenant of three or more flats from participating in a collective freehold acquisition claim
• increasing the non-residential exception from 25% to 50% meaning that many more buildings would fall with the right of collective freehold acquisition
• removing the financial and rateable value limits that currently apply to house claims

Enfranchisement procedure

As stated above, one of the Law Commission’s main proposals is for a single procedure that will apply to all enfranchisement claims with one set of prescribed notices.  The Law Commission is keen to limit challenges to the validity of those notices and remove what it sees as a number of procedural hurdles.  They also propose removing the automatic deemed withdrawal of a tenant’s claim where certain procedural deadlines are missed.  There is clearly merit in making things simpler and quicker but this needs to be balanced against the fact that the procedure provides for the compulsory purchase of the landlord’s property interest and so there needs to be a clear and reliable process. 

An example of where the balance between landlord and tenant is tested to its limit relates to service of the tenant’s notice initiating the claim.  The Law Commission proposes that if certain checks are made and procedures followed, the claim notice will be deemed to have been served.  This means that service can be deemed even when the landlord hasn’t actually received the claim notice.  The risk is mitigated by a recommendation that where a landlord fails to respond to a claim notice the tenant won’t entitled to a new lease based on their proposals, which is currently the case, but instead the terms would be settled by the Tribunal.

Dispute resolution and costs

If brought into force by the Government, the Law Commission’s proposals should see a significant reduction in disputes around enfranchisement claims in the long-run.  However, as with any new legislation, there would be plenty of room for disputes around the interpretation of the new laws with the definition of ‘residential unit’ likely to be a key area of contention.  As the law currently stands there are certain issues in relation to qualification and procedure that are dealt with in the County Court and other matters such as valuation and lease / transfer terms deal with in the First-tier Tribunal.  The Law Commission proposes that all disputes should be dealt with by the Tribunal.  Having everything dealt with in one place is at face value a good idea but it would rely on the Tribunal system being provided with sufficient resource to deal with a significant increase in work.  

Finally, another of the more controversial proposals relates to costs.  Currently the tenant must pay the landlord’s reasonable costs of investigating and valuing the claim and dealing with the lease or transfer.  This reflects the fact that the tenant is effecting a compulsory purchase of the landlord’s property interest.  The Law Commission proposes abolishing this requirement entirely or replacing it with a fixed costs regime.  It will ultimately be a political decision as to how far the Government wants to go to make it easier and cheaper for tenants to enfranchise.  Whilst also important, the second proposal on costs is likely to be less controversial.  Given that all disputes will be dealt with by the Tribunal they will be subject only to a very limited costs jurisdiction. 

Conclusion

It remains to be seen how and when the Government responds to the Law Commission’s recommendations.  There are important political decisions to be made and landlords and tenants across the Country will be watching with great interest.

Please do not hesitate to contact James Souter or your usual Charles Russell Speechlys LLP contact if you have any queries.  This insight is not a substitute for legal advice on the specific circumstances of the case.