In this second article in our series of three we look at what it means for residential leaseholders and their landlords following the Government’s confirmation that it will enact the remaining Law Commission recommendations around enfranchisement rights (leaseholders rights to extend their lease or acquire the freehold to their house or block of flats).
The Law Commission’s recommendations are set out in its report “Leasehold Home Ownership: Buying Your Freehold or Extending Your Lease”. The stated intention of the recommendations was to “help make our homes our own rather than someone else’s asset. They are intended to make the law work better for leaseholders”. Their report was described as a root and branch review of enfranchisement rights.
The report sets out 102 recommendations. Some of these were included in The Leasehold and Freehold Reform Act 2024 (L&FRA’23) which received Royal Assent just before Parliament closed for the election.
So which recommendations didn’t make that cut and so might be contained in the Leasehold and Commonhold Reform Bill announced in the King’s Speech and what are the implications for leaseholders and their landlords?
Voluntary/informal leases extensions - Leaseholders selling may struggle.
If the recommendations are implemented then, ironically, leaseholders may suffer due to landlords becoming unwilling to grant them an informal lease extension.
This may be a problem for leaseholders in the process of selling, as they often only consider extending their lease at the point they agree a sale and then need to conclude the lease extension quickly, to tie it in with completion of the sale. A voluntary extension, where the landlord will entertain it, can be much quicker than following the statutory process.
A practical alternative can be for buyers to take on the benefit of a statutory lease extension claim however this only works if the current non-extended term is long enough to meet the lender’s requirements. Also buyers can be reluctant to accept the uncertainty as to what the premium and associated costs will turn out to be.
The reason landlord’s may be unwilling is that controls are to be imposed; the terms of voluntary lease extensions (and individual freehold transfers) will need to be blessed by the Tribunal as being objectively reasonable and fairly priced.
Landlords would be at risk if they were to proceed without this blessing; any lease extension (or transfer) containing obligations that are inconsistent with the statutory scheme would be unenforceable. If a voluntary lease extension omitted terms or the grant of rights that would have been included under the statutory scheme, then the landlord would be obliged to add them in later, or face liability for any losses suffered by the leaseholder as a result.
This rigmarole and risk will mean that there will be little incentive for landlords to proceed outside the statutory scheme. So voluntary lease extensions may become a thing of the past as it will be safer for landlords to require leaseholders to go through the statutory process.
Collective acquisitions of freehold will not be controlled in the same way, as the risk to leaseholders is considered lower.
Whether this proves to be a problem for leaseholders may depend on how the Government deals with the valuation aspect of the L&FRA’23; if premiums are reduced significantly then lenders may over time change their requirements to accept shorter lease terms and so effectively remove the pressure for leases to be extended as part of the sale process.
Sales that can proceed by assigning the benefit of a statutory lease extension claim to the buyer will be made easier by the automatic transmission of the claim with the lease on sale, absent an express withholding of the transfer of the benefit (so reversing the current position by doing away with the current need for additional documentation and cost). Buyers will also receive the right to disclaim the transfer of the benefit of a claim notice, so they can avoid being burdened with unwanted or defective claims.
Simpler and cheaper?
Contrary to the aim to make the process simpler for leaseholders, the statutory process may in practice become much more drawn out and involved for them. While the risk of satellite litigation with its associated costs should reduce with the removal of sanctions for missing procedural deadlines (which is good news for leaseholders) it will also mean that landlords have less incentive to give their response notice and so leaseholders may find themselves having to apply to the Tribunal to determine the terms more often.
This is because the leaseholder’s premium and other proposals won’t bind the landlord if it fails to give its response notice in time so there is no windfall for leaseholders in this situation and a corresponding incentive for landlords to embark on expensive satellite litigation challenging the validity of the leaseholder’s notice.
The only fear that landlords may have is that the Tribunal might award a premium below the figure that they think they might otherwise have achieved if they had given a response notice and they will now lose the ability, save on very limited grounds, to challenge that determination.
Claims may lie dormant for much longer than they do under the current regime as leaseholders will no longer suffer an automatic termination of their claim if they fail to apply to the Tribunal to determine the claim within six months of the response notice. The onus will be on the landlord to apply to the Tribunal to strike out claims instead. They may be reluctant to do so in view of the related costs.
Claims may then be forgotten and potentially complicate later claims as they will no longer need to be registered against the landlord’s title, creating a risk of some confusion and perhaps litigation depending on the fluctuation in values over time.
Settling the form of lease will become simpler; leaseholders will receive greater protection when extending their lease as the scope for changing other terms of the lease (besides the term and rent) is to be restricted. While the ability to make changes to the existing lease to correct defects or reflect changes to the extent of the premises is to remain, they recommend that the parties will no longer be able to agree whatever other terms they wish so as to rein in the perceived inequality of bargaining power between landlords and leaseholders. There is also to be more flexibility available where the flat was formerly held under a lease of a larger element of the building.
Also, the continuation of rights into the new lease is to be improved. Rights currently enjoyed by a leaseholder, such as a right of way over external land, are to be included in the new lease regardless of who originally granted them and whether that was via the flat lease or separately; this is to close off the problems that can ensue from the freehold reversion becoming fractured over time. By contrast leases which include significant surrounding land can only be extended in respect of the premises and any surrounding land that is in some way associated with the premises, to avoid unfairness to landlords where the existing lease included large external areas such as woodland or farmland.
Leaseholders will have a less expensive experience where either their landlord doesn’t respond to a claim, or they are missing; they will be able to apply to the Tribunal rather than the County Court and so they will avoid the additional costs and time that currently involves.
The treatment of Business leases is to change; a more accurate method of identifying the types of premises that should qualify for enfranchisement rights is to be introduced to clarify, for example, that live/work units are within the regime. This is reflected in the right to manage recommendations.
The process is to be streamlined with a single set of prescribed notices for the new single streamlined procedure. As part of that the terminology is to change; “Residential unit” is to replace “houses” and “flats”. A helpful flow chart showing the steps under the consolidated scheme for enfranchisement are set out in the flow chart at figure 6 paragraph 6.393 of their report.
The scope for challenge is to be limited. Valuation only disputes are to be dealt with by a single valuer member rather than a full hearing.
Shared Ownership
Shared ownership leaseholders who haven’t yet staircased to 100% will be able to extend their lease in the same way as full equity leaseholders, while preserving the shared ownership nature of the lease.
The premium payable is to consist of the usual cost of buying out any ground rent payable under the lease, but only a proportion of the landlord’s deferred reversionary interest in the property. Criteria for the exclusion of a shared ownership lease from freehold acquisition are to be set out.
Landlords burden and costs to increase
Landlord’s burden and so their costs will increase, for example landlords will have to notify other landlords of the claim and deal with dormant claims. Their ability to recoup their costs has in most cases been removed by the L&FRA’23.
New Right of Individual Freehold Acquisition
A new right will give leaseholders who hold all of the units in a given building the right to acquire their freehold. This includes buildings containing only a single unit.
This will assist commercial leaseholders, such as registered social landlords who will often hold an entire building via a single lease. They will no longer have to claim leases of each individual flat separately and be left with a fading husk of a lease in respect of other parts of the building.
Collective enfranchisement
Currently leaseholders are restricted to acquiring the freehold to a single self-contained building or part of it. It has been recommended that the right be expanded to enable them to acquire multiple buildings or parts of buildings in one claim, i.e., several blocks of flats on the same estate, therefore benefitting from economies of scale and potentially avoiding problems around the acquisition of land that falls outside the relevant building.
Allowing those with three flats or more in a building to count as a qualifying tenant will bring more buildings into qualification for the right to enfranchise and so will be welcomed by leaseholders.
Leaseholder’s ability to acquire external land is to be increased; They will continue to have the right to acquire the freehold interest in external land demised with their flat lease, (such as a garden) and to land used exclusively by the owners and occupiers of those units. With the landlord’s consent or Tribunal’s approval they will also be able to acquire land that isn’t used by them exclusively.
Enfranchisement tennis is to slow down. To prevent claims taking place in quick succession the Commission recommends that after a successful claim there should be a gap of two years before another can be made.
While the right to participate after the event is attractive in principle, particularly for the buyer of a flat in a building where their predecessors chose not to join in the acquisition of the freehold, creating the ability for this may make it harder to obtain participation originally to get a claim off the ground and introduce complexity which the Commission was seeking to remove from the process. So we question whether this right will be introduced.
Leaseholders are to have the right to obtain information from the landlord before making a claim and to enforce that before the Tribunal with costs sanctions available where the leaseholder chooses to commence a claim despite the lack of response from the landlord. This will be important in cases such as where the landlord has developed parts of the building, but it is unknown how many flats exist within them.
The Commission has stepped back from recommending that a corporate body always be used as the nominee so as to give leaseholders more flexibility i.e., to proceed in their personal names in respect of smaller buildings. Likewise, while they recommend model constitutional documents for a corporate nominee, their use isn’t to be made compulsory.
The resident landlord exclusion is to be removed.
For two leaseholder buildings it remains the case that both will still need to participate, and so unfortunately one can hold the other to ransom.
House Leaseholders
Those currently drafted out of the right to enfranchise will enjoy enfranchisement rights; while the Commissioners rowed back on their provisional view that leaseholders should be able to acquire the freehold to everything let to them by their lease, they have gone the other way to assist leaseholders of houses whose ownership doesn’t extend to the entire building (for example the roof might be excluded) to enable them to acquire their freehold where they currently cannot.
Landlords will be disappointed, particularly where they have structured the lease to exclude the possibility of an enfranchisement claim, and perhaps accepted a reduced premium to reflect that or would not have granted a long lease if it could be enfranchised.
As regards any rights that the freehold currently benefits from or is subject to, the general rule will be for leaseholders to take the freehold on that basis without amendment so that, for example, they would receive the benefit of a private right of way over a neighbour’s property and they would take subject to restrictive covenants affecting it.
That said, a leaseholder won’t take subject to rights that didn’t already affect them under their leasehold title, so that their burden cannot be increased in this regard.
There will be strict control over the imposition of new property rights when the freehold is being acquired, to protect leaseholders from obligations being imposed that are designed to generate a profit or provide an ongoing income stream for landlords. New rights will have to be capable of amounting to an easement under existing property law or a land obligation if introduced pursuant to the Commission’s recommendations in Making Land Work. They will only be permitted to the extent that they replicate an existing right in the leaseholder’s lease.
Leaseholders will take free of mortgages, beneficial interests under trusts of land, and estate contracts and options. Personal obligations should in the main fall away, with the exclusion being where the covenant is designed to support enforcement of positive covenants in an estate situation. New personal obligations will not be permitted.
Any mortgages on a house leaseholder’s title will automatically transfer onto the title for the new lease, so avoiding the need for additional documentation to be executed on a house lease extension claim.
Leaseholders will be able to elect whether to merge their leasehold interest in the freehold they acquire on completion, and where they do so, rights benefiting/burdening the lease are to be automatically transferred up to the freehold title. Freeholders will not be prevented from transferring their interest by third party rights such as mortgages and beneficiaries under trusts of land; they will be deemed to consent to the transfer of the freehold or grant of the lease extension as appropriate.
Intermediate Leases and Other Leasehold Interests
The competent landlord is to owe a duty to other landlords to act in good faith and with reasonable skill and care. The other landlords are to have the right to apply for directions from the Tribunal about the conduct of or response to the claim.
Intermediate landlords will be required to provide all information and assistance to the competent landlord that is reasonably required and to contribute towards any non-litigation costs incurred by them dealing with the claim.
For intermediate leases of residential units, which make the leaseholder eligible to participate in a collective claim, that leaseholder will have the power to decide whether their interest is acquired so that they don’t lose possession of the flat they live in for example.
Conclusion:
Overall, the changes represent a boon for leaseholders and increase the burden on landlords.
While there are likely to be some unintended consequences overall the rights will become simpler to exercise and so reduce expense for leaseholders.
Some landlords may fail to engage as a result of the changes particularly if the premium payable falls and this might cause the leaseholder to have to work harder and incur more expense to obtain the extension they need.
Leaseholders in the process of selling may struggle. They may wish to obtain an extension before the recommendations become law. This may be ameliorated by the level at which premiums are set as this in turn may cause the market, ie lender’s requirements, to soften around the need for lease extensions.
Shared ownership leaseholders struggling with the current system, those enjoying new rights to acquire their freehold alone and head lessees who occupy a flat in the building will be pleased.
The government intends to publish the draft Leasehold and Commonhold Reform Bill in the 2024-25 parliamentary session.
Mark Vinall, Partner, Ashley Wilson Solicitors
