The sale of houses on a leasehold basis has been criticised in some quarters because of its apparent unfairness to leaseholders. Leaseholders, in contrast to freeholders, lease a property for only a number of years. The question then being, what happens at the end of the term?
Enfranchisement rights provide leaseholders who hold a lease of 21 years or more with the right to buy the freehold of their house or obtain an extended lease of their house or flat. The procedure for doing so is not, however, universally popular. Leaseholders argue that it is complex and expensive, leading to unnecessary conflicts, litigation and delay.
In light of this, the Law Commission has recently published a position paper on proposed reform of the enfranchisement process.
The current enfranchisement rules are contained in over 50 Acts of Parliament. Moreover, there are different rules for leaseholders of houses and of flats, and the qualification criteria are complex and scattered across several statutes. Bringing an enfranchisement claim, even if there is no dispute between the parties, often brings about legal and other costs because of the complexity of the process. To make matters worse, leaseholders of houses are required to contribute towards the landlord’s non-litigation costs. Even if these costs are considered unreasonable, leaseholders are often left with no other option than to pay because of the disproportionate cost of disputing the sums.
The scheme is also unpopular due to its highly technical nature; simply beginning a claim can give rise to difficulties for a leaseholder. Minor errors in the tenant’s initial notice may invalidate the claim. Landlords might be difficult to identify, and there can be disputes about whether a notice has been validly served. Professional advice (plus the associated costs) is often required at an early stage.
Leaseholders argue that the valuation approach in the scheme is overly complex and difficult for the layman to understand. Leaseholders also state that where ground rents are high, the need to enfranchise is even more important for the leaseholder, but premiums are also too high.
In response to all this, the Law Commission has proposed several changes. These include changing the formula for calculating the valuation of the property and removing the requirement for leaseholders to have owned the property for two years before trying to buy it. The Law Commission also proposes replacing the right of leaseholders of houses to purchase a one-off 50-year lease extension at a high ground rent with a right to purchase an unlimited longer lease extension without a ground rent and to generally simplify the procedure in a bid to save both parties’ costs.
The Law Commission has stated however, that the intention behind the proposals is not to remove the requirement for leaseholders to pay landlords an appropriate price but rather to improve the process and reduce premiums payable by leaseholders, while ensuring sufficient compensation is paid to landlords. They must also take care not to cause damage to the leasing market at a time when supply is not meeting demand. Perhaps though, this is easier said than done… We shall find out later this month when the Law Commission plans to publish its full consultation paper!