Micheal Gove unveils “landmark moment for millions of leaseholders across the country” as the Leasehold and Freehold Reform Bill is introduced to Parliament. So, what does this mean for Leasehold Enfranchisement and Extension?
The Leasehold and Freehold Reform Bill (Bill) was introduced to Parliament on Monday 27 November and this seeks to extend tenant rights in terms of freehold enfranchisement and lease extensions by amending the existing legislation - the Leasehold Reform Act 1967 (1967 Act) and the Leasehold Reform, Housing and Urban Development Act 1993 (1993 Act). While a number of these changes are of a procedural nature a small number of the changes will extend existing tenant rights and tip the balance further in favour of tenants from a value and control perspective.
You may also be interested in our related article on “The Leasehold and Freehold Reform Bill: what it means for leasehold and estate management costs and rentcharges”.
A summary of the substantive changes transferring value from landlords to tenants
- The standard lease extension term for a house (under the 1967 Act) is 50 years in addition to the original term and for a flat (under the 1993 Act) is 90 years in addition to the original term. The length of both extensions under the Bill will be 990 years in addition to the original term (although it is fair to say it is hard to envisage a scenario where the long leasehold tenant of a house would not seek to purchase freehold rather than a 990-year lease extension). A premium will be paid to reimburse the landlord for the loss of the reversion and any rent payable will drop to a peppercorn.
- There are detailed provisions in the Bill relating to valuation of the compensation which will need to be unpicked by a valuer. However, the general effect of the change in the valuation method will be to make it cheaper for tenants to extend their leases or acquire the freehold. Marriage value will also no longer be taken into account. In addition, if the valuation under the existing provisions of the 1967 Act would be more favourable, then a tenant will be entitled to elect the most favourable valuation method. In general, it will be cheaper for tenants to extend their leases or purchase the freehold interest.
- Should a group of tenants wish to collectively enfranchise (ie purchase the freehold) then under the existing provisions of the 1993 Act they are prevented from doing so if more than 25 per cent of the building was non-residential. Under the Bill, this threshold will be increased to 50 per cent, allowing tenants of buildings with a higher commercial element to collectively enfranchise. The higher threshold will also apply to tenants who wish to take over management through a right to manage claim. It is unclear whether a group of tenants will be able to afford the high premium which will be payable in relation to commercial parts in a collective enfranchisement claim where the reversion is short, if the landlord does not opt for a 999-year leaseback. However, this amendment is likely to reduce litigation as to where the 25 per cent cut-off for non-residential parts sits.
- A landlord can no longer seek to oppose a claim on the grounds of redevelopment; on the basis he or she is or will be a resident landlord; or if the land is required for public purposes.
A summary of the procedural changes
The procedural changes are not anticipated to have any real effect on landlords and their portfolios but will simplify the process for extending leases or acquiring the freehold of houses and flats.
- There will no longer be a two-year qualifying period for a tenant to make a claim to acquire the freehold of a house or extend the lease of a flat when they purchase a property. This will prevent landlords from using the legal framework to elicit a higher premium by forcing a tenant to wait two years when there may been an increase in capital values (historically in a rapidly rising market) or a drop in lease length.
- If a tenant makes a claim and then subsequently withdraws from that claim (or there is an otherwise deemed withdrawal) the tenant will no longer need to wait for a period of one year before making a fresh claim – he or she can do so immediately.
- Currently the 1967 Act and 1993 Act have complex processes for dispute resolution that are determined either through the Courts or Tribunal system. The Bill seeks to replace this complex system with a new clearer process for dispute resolution.
- Costs apportionment of completion of the enfranchisement will be more controlled in favour of the tenants to the extent they will no longer be obliged to meet landlord costs except in specific circumstances.
Many of the changes will simplify the process of enfranchisement and this will be welcomed widely. However, it remains to be seen whether those with vested interests, such as the large London estates, pension, and investment funds, will seek to challenge the far-reaching reforms on valuation which will have a profound effect on their portfolios.
It is interesting that the Bill amends the existing legislation rather than providing a new composite piece of legislation. This leaves a number of issues within the existing legislation unresolved. For example, it is not proposed to amend the definition of “house” even though this point has been widely litigated since the inception of the 1967 Act. This means we are left with the unsatisfactory position whereby current case law continues to cause confusion in terms of what constitutes a “house”, particularly in mixed-use premises (such as commercial premises with a flat above). Landlords will continue to use this and other loopholes in the existing legislation to refuse enfranchisement claims where they can.
Of course, we do not know whether all reforms proposed in the Bill will be passed by Parliament. Please let us know if we can assist in advising you on how the proposed reforms apply to your circumstances and how (either as a landlord or as a tenant) you should proceed at this stage.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2023