PROPERTY JOURNAL

Easing property lease extensions

The Law Commission's consultation on leasehold reform proposes to simplify the process of extending leases and acquiring freeholds

Author: Amy Lewis and Shabnam Ali-Khan

07 March 2019

The current legislation for extending leases on flats, the Leasehold Reform, Housing and Urban Development Act 1993, and on houses, the Leasehold Reform Act 1967, recently came under review, with a Law Commission consultation closing at the start of January.

As law commissioner Prof. Nick Hopkins points out, "the current system is complex, slow and expensive and it's failing homeowners". The residential leasehold system has been the subject of much criticism over many years, which led to Law Commission consultation paper 238: Leasehold home ownership: buying your freehold or extending your lease. Its aim was to gather a range of views on ways to simplify the process, to remove limitations on rights to buy the freehold and to extend leases.

The last significant legislation in this field, the Commonhold and Leasehold Reform Act 2002, widened the right for leaseholders to extend leases by removing the residence requirement. However, it left largely untouched a long and convoluted legal process.

The commission's proposals therefore aim to:

  • make the process quicker, cheaper and easier
  • improve the rights of leaseholders to extend their leases and acquire the freeholds
  • bring in a unified procedure for both houses and flats
  • remove limitations on the right to enfranchise, including the two-year ownership requirement.

There are currently estimated to be more than 4.2m leasehold properties in England alone, more than half of which are owner-occupied, so the need for a radical overhaul is clear.

Unified procedure

Currently, leaseholders of flats have the right to a 90-year lease extension on top of the unexpired period, with houses having a right to an additional 50 years. In both cases the leaseholder must be the registered proprietor of the property for at least two years before serving a notice to exercise their right.

Leaseholders of flats pay a premium for this right, leaving them with a peppercorn ground rent; leaseholders of houses, although not paying a premium, are landed with an often high modern ground rent.

The proposals include introducing one, unified procedure for both flats and houses. The commission's favoured option is for this to be at a nominal ground rent and exercisable multiple times. Consultees were invited to submit views on the length of the lease to be granted, as well suggesting changes to the existing redevelopment rights. Should the new lease be for 125 years, 150 years or another length? Should a landlord's redevelopment rights be altered?

However, should we be focusing on a one-size-fits-all approach? Or should we be considering more tailored options, such as a right to extend the lease for a lower premium but with a ground rent or a higher premium with no ground rent? The downside of this tailored approach is it may make the statutory procedure more complicated. There is a risk that those leaseholders who struggle to pay larger premiums may end up paying more in the long run with a ground rent, or being pressured into agreeing a deal that might not be in their best interests.

Mechanism to exercise rights

The proposal for a single procedure is one of the measures designed to make the processes for both flats and houses easier and less expensive, as well as reducing vulnerability under with the current statutory procedures, especially those for flats in the 1993 Act.

There is a prescribed form of notice for asserting the right to enfranchise under the 1967 Act but not under the 1993 Act, so when it comes to such claims practitioners must rely on their interpretation of the legislation to ensure that all the required constituent parts are included in the initial notice of claim. As a result, there is a risk that the notice may be invalid. If the landlord alleges that it is, and the parties cannot agree, then an application must be made to the county court for a declaration as to its validity, which will in turn determine whether the claim can proceed. A prescribed form would significantly reduce any uncertainty about validity, and, it is proposed, this uncertainty would be reduced further by the introduction of a set of limited defined grounds on which a notice can be deemed invalid.

Currently, the issue of validity is determined by the county court. However, not all matters are within the county courts' jurisdiction, and some have to go before the First-Tier Tribunal. This is another example of the complexity of the current process that the commission aims to address through its proposal that all disputes and issues arising during an enfranchisement claim should be dealt with by the tribunal. This would include occasions where there are issues in dispute after a response has been given by the landlord to the initial claim, where no response notice has been given within the prescribed period, and where an order has been given by the tribunal letting a claim proceed in the event of a missing landlord.

"There are currently estimated to be more than 4.2m leasehold properties in England alone so the need for overhaul is clear"

The latter scenario is one that is presently a complex, lengthy and costly procedure where the tenant can end up paying far more in costs than they pay for the lease extension. The proposal to simplify the process where there is an absentee landlord includes not only the ability of the tenant to make the application for an order that a claim may proceed to the tribunal rather than the court, but that this be done on the basis that the claim notice will be deemed to have been served on the landlord if posted to an address falling within specified categories.

Valuation reforms

Alongside the process of making the claim is the need for a valuation of the premium payable for lease extensions or freehold acquisitions, which is where many disputes – and therefore delays and costs – occur. The Law Commission is suggesting the introduction of one clear method of calculating the premium to ensure that landlords receive sufficient compensation, as per clause 15.4 of the consultation. Currently, the landlord of a flat will receive a premium based on the value of its interest, the marriage value – a reflection of the additional value arising as a result of the lease extension or freehold purchase – and other compensation. It is these that can give rise to the disputes between parties and experts, so the adoption of a simplified formula could see a welcome reduction in such conflicts. The difficulty will be striking an acceptable balance between reducing premiums for leaseholders while ensuring that landlords are sufficiently compensated.

The consultation paper was more than 500 pages long and, while it is fairly accessible for those practising in enfranchisement, the 24-page summary paper highlights the salient points very well. All the same, given the length of the consultation paper, we have only been able to touch very briefly on the areas we think most noteworthy here. This is a complex and cumbersome area of law that has long cried out for reform and, with competing interests to manage, the Law Commission has a difficult task ahead. It is hoped that those of us who have day-to-day experience in the field, particularly where we act for both landlord and tenants, have shared our views and experiences to help produce a simpler, more effective, process for all involved.

amy.lewis@russell-cooke.co.uk

shabnam.ali-khan@russell-cooke.co.uk

Related competencies include: Landlord and tenant, Property management

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