Reforming leasehold enfranchisement: the proposed solutions

As reported in Law-Nows (20.07.18, 27.02.18 and 21.12.17) the Law Commission has been tasked by Government to address the need for reform in residential leasehold. This follows the response to the 2017 Government Consultation “Tackling Unfair Practices in the Leasehold Market”.

As part of the Thirteenth Programme of Law Reform, the Law Commission embarked on the enfranchisement project designed to undertake a comprehensive review of enfranchisement of houses and flats to improve the position of leaseholders as consumers.

The Law Commission published an initial paper summarising proposed solutions for leasehold houses in July 2018. Today it has published its highly anticipated paper setting out proposals for enfranchisement reform which will apply to both flats and houses.

Terms of Reference applied by the Law Commission

The policy objectives of enfranchisement reform identified by Government were as follows:-

• to promote transparency and fairness in the residential leasehold sector;
• to provide a better deal for leaseholders as consumers;
• to simplify enfranchisement legislation;
• to consider the case to improve access to enfranchisement or reforms to better protect leaseholders including the ability for leaseholders of flats and houses to enfranchise on similar terms;
• to examine the options to reduce the premium payable to enfranchise whilst ensuring sufficient compensation to landlords to reflect their legitimate property interests. This would cover existing as well as future leaseholders;
• to make enfranchisement easier, quicker and more cost effective with a clear methodology for calculating the premium;
• to prioritise solutions for existing leaseholders of houses.

Solutions proposed to meet these objectives

The paper is lengthy running to some 546 pages. By way of initial headlines only, proposed reforms include:-

• A new, single enfranchisement regime applying to both flats and houses;
• Solutions to reduce the combined costs of enfranchisement (professional costs and premium payable).

Premiums payable to enfranchise

This will undoubtedly be the most significant and controversial aspect of any reform. The Law Commission have identified options aimed at achieving a simpler, clearer and consistent valuation methodology. When calculating premiums, it has identified options for reform which it has divided into two categories:-

Option 1: The adoption of a new single formula which will be a move away from valuing based on identifying market value. The Law Commission has identified this would reduce premiums but risks producing arbitrary premiums.

Option 2: Options based on the current valuation methodology, combining various existing valuation components in different ways to reduce the premium.

In addition, it has considered the use of an online calculator to support valuation which would limit the need for expert assistance.

Conclusion

The extent of the proposed reform is considerable, containing solutions that if implemented would significantly reshape the current enfranchisement regime. They tackle the criticisms attached to the current regime, focussing on securing a better deal for leaseholders.

Whilst these proposals will no doubt be well received by leaseholders, the financial implications on landlords, the property market and the economy will be considerable. The terms of reference require that the interests of landlords be kept in mind ensuring “sufficient compensation” is payable to reflect their legitimate property interests. Any changes in law will have to comply with human rights legislation taking into account the significant impact this reform will have, for which Government will need to separately undertake impact assessments when considering which reform options to pursue. The paper recognises that the question of whether to reduce premiums is not simply a legal or valuation question. Political judgement will also need to be applied.

The Law Commission have invited responses from stakeholders submitted by 20 November 2018.