202.The Law Commission published its 568-page consultation paper into leasehold enfranchisement in September 2018 and a final report is due to be published later in 2019. Our report does not seek to replicate the Commission’s comprehensive and important work. Instead, this chapter reflects the evidence we have received from leaseholders, freeholders and others regarding the broad principles for how a future enfranchisement process should operate. In particular, we consider what more might be done for those leaseholders who are unlikely to ever be able to afford to enfranchise, whether or not it is made less expensive. We also reflect on how the difference between the statutory and informal routes to enfranchisement are understood, and whether greater clarity is needed in this respect. Several National Trust leaseholders wrote to us about the difficulties they have owning a leasehold property on inalienable land, in particular the limited rights they have to enfranchise or extend their leases. Finally, this chapter reflects on the evidence we heard that, while the Law Commission’s programme of work is welcome, a wider and more comprehensive review of leasehold legislation is required.
203.Leaseholders informed us that the current enfranchisement and lease extension process is costly, complex, lacked consistency and is characterised, as in other areas, by leaseholders feeling they are unable to challenge the freeholder’s demands. We heard from many who told us they were unable to afford the high costs they had been quoted for extending their leases:
I have 52 years left on my lease at the moment [ … ] Without 75 years on the lease I am unable to re-mortgage or sell the property. I therefore have no access to the equity. I am trapped by this. I would have to borrow money to obtain a lease. The last figure quoted was £18,000 with £900 costs just to start the process. I am 70 years old and no one would lend that amount of money as I still have a small mortgage left to pay [ … ] I explained this to the property company who then quoted a lower figure but with a ground rent of £461 pounds. At the moment I pay £15 annually. My property is worth about £110,000 at best—Anonymous
My valuations, based on the present lease basis—doubling ground rent every 10 years for 50 years—[the surveyor] has suggested that the premium the freeholder ‘could’ ask is £57,000, but said he would argue £11,250 as being fair as a staring offer. On top of this, I have to pay ALL costs (the surveyor says his fees would be 20% of any amount he saves under £57,000), and that I should anticipate around £15,000 for all fees–including those of the freeholder. As things stand, my property is blighted, and cannot be sold to anyone other than a cash buyer—Mr Paul Horwitz
I was a first-time buyer [ … ] I have lost thousands of pounds in solicitor fees from trying to sell and buy another property. I have also had to pay solicitor fees for trying to vary the [doubling ground rent] lease with the management company on behalf of the freeholder, who has told me they will not do this. I would have to extend the lease. They told me that to extend the lease their opening offer is £96,000 for a property now valued at £130,000. I do not have this amount of money—Mr Jared Morgan
204.The current valuation process for enfranchisement is highly complex and depends on several factors, including the rateable value of the house at different dates—which is not always possible to obtain—the ground rent, the number of years left on the lease and the current value of the house. Valuations are carried out by qualified chartered surveyors. Marriage value—the additional value there is in owning both the freehold and leasehold interests—is payable on leases with fewer than 80 years left to run, split equally between the freeholder and leaseholder. A 2016 Upper Tier Tribunal decision and subsequent Court of Appeal ruling, Mundy vs The Trustees of the Sloane Stanley Estate—which concerned the mathematical model used to determine the amount to be paid to extend the lease of a flat—was criticised by Parthenia Research for requiring the use of a methodology likely to increase costs for leaseholders. Sir Peter Bottomley, representing the APPG on Leasehold and Commonhold Reform, said that, as a consequence of the decision, “leaseholders will have to pay a third more to extend their leases, more than the existing understood system, and even that was thought to be too high.”
205.Further, there are two routes a leaseholder can consider when extending their lease: the informal route, where the leaseholder contacts their freeholder to try and negotiate a lease extension; and the statutory route, as set out under the Leasehold Reform Housing and Urban Development Act 1993, which provides a formula that a surveyor uses to calculate the cost of extension. The Law Commission highlighted the informal route as a concern, noting that there could be incentives for leaseholders to agree to voluntary transactions which would expose them to significant risks, such as (in the case of a lease extension) onerous terms in the new, extended lease. Amanda Gourlay, a barrister specialising in leasehold law, told us she would always advise her clients to extend their leases through the statutory route:
I have tended to think that if I am advising a leaseholder—and I can think of one case where I was told by a leaseholder, “The landlord has offered to extend the lease outside the Act”—my response has been, “As a matter of instinct, if Parliament has seen fit to legislate to protect the consumer in this area, my inclination is to suggest that you go with the process that Parliament has suggested, rather than go with something outside the Act”.
206.Shula Rich, representing the Federation of Private Residents’ Associations, told us that many leaseholders were unaware there were two routes, and this was not always clear when freeholders made informal offers. Indeed, Katie Kendrick, from the National Leasehold Campaign, highlighted that this lack of clarity had led to some panic from leaseholders:
All of a sudden, in the last six to 12 months, freeholders are offering a lot of what appear to be attractive freehold purchases. They will contact the leaseholder directly and say, “You can now buy your freehold for £5,000. It is a time-limited offer for three months, and you have three months to accept”. It is creating panic among leaseholders thinking that they have only three months to accept this offer; otherwise, they are going to sell it on to a third party. It is creating such panic among leaseholders that they are now doing these informal freehold purchases directly with their freeholders, thinking that they have to do it because, if they sell them on, it is going to be even more.
207.The Minister for Housing and Homelessness acknowledged that the lack of clarity and understanding around the statutory process was a concern and noted that it was important to “get the information out there that leaseholders can go to the tribunal and strike a fair price between the leaseholder and the freeholder.”
208.It is not always clear to leaseholders that there is a statutory route to enfranchisement and lease extensions, and this has led to many accepting worse terms than they might otherwise have been legally entitled to. Freeholders should be required to provide an estimate of the statutory cost of enfranchisement or lease extensions when making an offer through the informal route.
209.In its response to the consultation into Tackling unfair practices in the leasehold market in December 2017, the Government asked the Law Commission to put forward proposals for the reform of enfranchisement legislation as part of its Thirteenth Programme of Law Reform, with a specific instruction to make the process “simpler, easier, quicker and more cost effective, and to examine the options to reduce the price payable by leaseholders to enfranchise”. The Government told us that the Law Commission’s enfranchisement consultation, which closed in January, had received over 1,000 responses and that the response would be published later this year.
210.Freeholders expressed concerns about the proposals that had been put forward by the Law Commission. Consensus Business Group told us they were concerned that the proposed changes were “disproportionate, unnecessary and may result in unintended detrimental consequences to the entire property market”, and that it was important to remember that the premium paid is to compensate for the loss of an asset that has been purchased by the freeholder. Long Harbour argued that the Law Commission’s pre-consultation paper included “significant inaccuracies in the analysis of the current approach to valuation, presenting a picture of the market that does not reflect the realities of the market and is verifiably erroneous.” The Ground Rents Income Fund warned that any attempt to introduce a fixed capitalisation rate to calculate enfranchisement premiums with no reference to market value or RICS RedBook valuation principles, would be “completely unfair and would represent an obvious transfer of value from one party to another without appropriate compensation”. There was, they argued, a need to balance the interests of leaseholders with those of the pensioners and savers who have invested in freeholds. Others, however, argued that that Law Commission’s proposals around valuations had been very good. Parthenia Research, a group of academics involved in the Mundy tribunal case, told the Committee they were, “positively encouraged by the excellent work of the team at the Law Commission, which has highlighted the absurdity of the circularity” of the current valuation methodology.
211.A specific proposal to make the enfranchisement premium a simple multiple of the ground rent was discussed by a number of witnesses, although many concluded that it would not be practical. Mick Platt, representing the Wallace Partnership Group, warned that “You cannot take something that is, of its nature, complex, and make it simpler just for the sake of making it simple.” Guy Fetherstonhaugh QC noted that it could be “grotesquely unfair”, while housing lawyer, Giles Peaker, also warned that a simple multiple was unlikely to work in practice, due to the wide variation in ground rents:
We are already in the situation where you have a huge variation in ground rents from literally a peppercorn through to several hundred, and indeed in some instances several thousand pounds. Any valuation based on a multiplier of the ground rent then produces a huge disparity between leaseholders, simply on the happenstance of whatever the ground rent set in their lease was. It also produces a huge disparity between different types of property. For instance, if you are a leaseholder in a block with terribly valuable airspace rights, where somebody can put up a couple of penthouses on the top and you can enfranchise for basically the same rate as somebody in a two-flat converted house, somebody is getting a huge windfall out of that. A set rate is not operable.
212.We support the Government in its objective to make it simpler, easier, quicker and cheaper for leaseholders to enfranchise. We agree that costs are too high and the process too complex. We support the Law Commission’s detailed analysis of this issue and look forward to the outcome of its consultation. We urge the Law Commission to recommend a process that will make enfranchisement substantially cheaper. If this represents “an obvious transfer of power from one party to another”, as freeholders warned, then that may be a good thing. The Government should implement these changes within 12 months, as many leaseholders are waiting to enfranchise under a new system.
213.As we have already noted, the Government’s proposal to reduce the premium payable to enfranchise is equally justifiable in human rights terms as our recommendation to reduce freeholders’ contractual income streams through lower ground rents. If the Government is willing to countenance a cheaper process for enfranchisement, it should have no objection to removing onerous terms from existing leases either.
214.We were told that, in many cases, regardless of how much cheaper the enfranchisement process becomes, some leaseholders will never be able to afford to enfranchise or extend their leases on their own. This was important to address, not just in terms of fairness—particularly to older people, who may be unable to borrow the money required—but also in ensuring that a two-tier leasehold market does not emerge, with those unable to afford to enfranchise trapped in the leasehold tenure and less able to sell or re-mortgage their properties. Jo Darbyshire, from the National Leasehold Campaign, warned:
You then have a whole chunk of people who cannot afford to enfranchise, whether they are in a house or a flat. You can have as many theoretical conversations about valuation bases for enfranchisement as you like. Whether it is £3,000 or £4,000, it is not an attainable amount of money. They just do not have it, so they will not be able to enfranchise, no matter what the new proposals are, which still leaves them with these onerous ground rents that are more than 0.1% of the property value.
215.The Minister for Housing and Homelessness did not appear receptive to the idea of providing low-interest finance to support leaseholders in such a position, arguing that she had “not found £2 million down the back of the sofa yet, I am afraid.”
216.While we look forward to the implementation of a reformed enfranchisement process, many leaseholders will struggle to afford to purchase their freeholds at any price. This is a particular concern for house lessees on estates with a mixture of leasehold and freehold tenure, but also where lease terms have affected the saleability and mortgage-ability of properties. The Government should introduce a low-interest loan scheme, so that leaseholders who want to enfranchise or extend their leases—but cannot afford to or obtain the necessary finance—have the opportunity to do so. This could be promoted as a form of Help to Buy for leaseholders.
217.The National Trust owns more than 250,000 hectares of land and around 25,000 buildings throughout England, Wales and Northern Ireland. There are 5,000 residential properties on National Trust land which are let to tenants, of which 20% are leaseholders. The National Trust explained that this ensures that these buildings are put to good use, that they are looked after and ensures that the Trust receives an income to help pay for their maintenance. 95% of the National Trust’s land is held inalienably—that is, it cannot be sold and only Parliament can authorise its compulsory acquisition. The National Trust can grant residential leases, but not if the length of the term would in practice amount to parting with the land. As such, the National Trust normally limits the length of leases on its inalienable land to 99 years:
We have made decisions on granting leases of inalienable properties in the expectation either that we would get the property back at the end of the fixed term or that within a generation we would have the ability to review the most appropriate use for the property. We hold these properties for the benefit of the nation and they have often been gifted to us, or funded by people who have given us money in that expectation. For the time being the best way of achieving that purpose has been to allow someone to live in such properties, which has the additional advantage of giving them a fully productive use.
218.We heard from several National Trust leaseholders who had not been able to enfranchise or extend their leases. Under the terms of the existing Leasehold Reform Act 1967, National Trust leaseholders are entitled to a single statutory 50-year lease extension that is subject to a review of ground rent at the start of the 50-year term. Once the statutory lease extension has been taken up there is no possibility of obtaining another 50-year lease extension and the only remaining course of action is to apply to the National Trust for a shorter voluntary lease extension that may or may not be granted. Mr Kevin Walker told us that, the effect of this process was to “render our homes unsaleable in the long term and the significant investments in improvements we have made are valueless.”
219.The Tenants Association National Trust (TANT) told the Committee that exemptions for the National Trust within the Leasehold Reform Act 1967 meant that National Trust leaseholders “are denied enfranchisement and lease extensions”:
The creation of inalienable status has removed forever access to Freehold and left tenants at the mercy of the Statutory Extension loophole provided in the 1967 Act intended for tenants not choosing to exercise their freehold rights [ … ] The issuing of Statutory Extensions leaves all National Trust tenants fearful of the Trust’s legal right to reclaim the ground (and what is on it) at the end of the Statutory Extension 50-year period.
They noted that the use of a statutory extension left tenants reliant upon the goodwill of the National Trust as to whether they would be willing to grant them a subsequent ‘voluntary extension’, which they would not be legally obliged to do.
220.The Minister for Housing and Homelessness told us it would be very difficult for the Government to amend the Leasehold Reform Act 1967 in order to give National Trust leaseholders more rights, and did not see how this would be possible in the short term. In its enfranchisement consultation paper, the Law Commission proposed three options for National Trust properties: that they continue to be excluded from statutory enfranchisement rights, be subject to enfranchisement claims in the same way as any other property, or be subject to more limited enfranchisement rights than other properties.
221.The National Trust told us they were very concerned by these proposals and said they could see properties being lost to the nation, including significant grade I listed historic properties, such as 16th and 18th century mansions, with associated parkland:
If the Law Commission’s proposals were implemented without any special provision for inalienable National Trust land, it could result in our long lease properties being lost to the nation. There is currently an exemption from enfranchisement of the freehold of houses and flats on inalienable land. This is an essential mechanism for ensuring the protection of significant buildings and places which have been entrusted to the National Trust to care for forever on behalf of the public at large, whilst putting the property to good use.
They called for an exemption for National Trust properties from the right to extend a long lease for certain categories of house or flat where it would be “entirely inappropriate” for the leaseholder to be able to extend their lease. They also proposed that they should have the right to buy back any long lease of inalienable land, at market value, on each occasion during the lease when the leaseholder wishes to dispose of it. This, they argued, would balance the financial interests of the leaseholder, while preserving the inalienable nature of the land entrusted to the National Trust.
222.National Trust leaseholders are in a difficult position given the inalienability of the land on which their properties sit. We support the National Trust’s proposal to buy back any long lease at market value, which balances the obligations they face on inalienable land, while protecting the value of their leaseholders’ assets. The National Trust, and other charities, may wish to consider whether it is appropriate to sell leasehold properties on inalienable land in the first place.
223.Several witnesses told us there needed to be a full review and consolidation of the law relating to leasehold properties, beyond the work currently being undertaken by the Law Commission. Professor Nick Hopkins told us that leasehold legislation was not fit for purpose:
Looking at the landscape of leasehold legislation, I would have to say it is not fit for purpose as it is. That view reflects what we have been told my stakeholders in response to, particularly, our consultation on our 13th Programme of Law Reform [ … ] The need for reform has become much more urgent [ … ] I would say the legislation we have that governs residential leasehold as it stands is not fit for its purpose.
224.Guy Fetherstonhaugh QC expressed his view that a full-scale review of the legislation was needed, arguing that, “We have had enough of little bits of amending legislation here and there. If people are going to reform leasehold further, there needs to be a vast, holistic, collective attempt.” Calls for a more comprehensive review of the legislation also came from beyond the legal professionals. Long Harbour expressed their view that limiting the Law Commission to focus on simplification and benefits for only one interest group, the consumer leaseholder, would not result in effective and fully considered reform in the sector:
We are however concerned that the Terms of Reference given to the Law Commission by MHCLG for the purposes of its reform projects are excessively narrow [ … ] there is a significant and historic opportunity to improve on and simplify the complex and poorly drafted existing legislation relating to the areas currently under review, such as the Commonhold and Leasehold Reform Act 2002, and the Landlord and Tenant Act 1987, in order to provide clarity and certainty for all stakeholders, as well as effective regulation for the management and ownership of residential property into the future.
225.The Minister for Housing and Homelessness told us that calls for a more comprehensive review of legislation needed to be judged in the context of what was achievable in limited parliamentary time. She told us it would be better to make “real improvements as soon as we possibly can”, rather than to wait several years for a more comprehensive review and forcing leaseholders to wait even longer for reform.
226.The work being undertaken by the Law Commission is important and welcome. However, the wider legislation that governs leasehold is not fit for purpose, and a more thorough review of leasehold legislation will be required. The Government should invite, and fund, the Law Commission to conduct a more comprehensive review of leasehold legislation, that would incorporate a full review of the Commonhold and Leasehold Reform Act 2002, the Landlord and Tenant Act 1987 and other relevant legislation.
350 , Law Commission, 20 September 2018
351 Anonymous ()
352 Mr Paul Horwitz ()
353 Mr Jared Morgan ()
354 , House of Commons Library, 14 December 2018
355 Parthenia Research ()
356 (Sir Peter Bottomley, APPG on Leasehold and Commonhold Reform)
357 Law Commission (), para 1.22(5)
358 (Amanda Gourlay)
359 (Katie Kendrick, National Leasehold Campaign)
360 (Heather Wheeler MP, Minister for Housing and Homelessness)
361 , Law Commission
362 (Lakhbir Hans, Deputy Director for Leasehold, Commonhold and Rentcharges, Ministry of Housing, Communities and Local Government)
363 Consensus Business Group (), para 3(e)
364 Long Harbour ()
365 Ground Rents Income Fund ()
366 Parthenia Research ()
367 (Mick Platt, Wallace Partnership Group)
368 (Guy Fetherstonhaugh QC and Giles Peaker)
369 (Jo Darbyshire, National Leasehold Campaign)
370 (Heather Wheeler MP, Minister for Housing and Homelessness)
371 National Trust (), para 3
372 National Trust (), para 12
373 Mr Kelvin Walker ()
374 Tenants Association National Trust (), para 1
375 Tenants Association National Trust ()
376 (Heather Wheeler MP, Minister for Housing and Homelessness)
377 , Law Commission, 20 September 2018, para 9.60
378 National Trust (), para 4
379 National Trust (), para 12(2)
380 (Professor Nick Hopkins, Law Commission)
381 (Guy Fetherstonhaugh QC)
382 Long Harbour ()
383 (Heather Wheeler MP, Minister for Housing and Homelessness)
Published: 19 March 2019