On 7 January 2021, and somewhat out of the blue, Housing Secretary, Robert Jenrick, announced that reforms to the existing leasehold system were soon to be implemented, with the press release announcing that “today’s measures come as part of the biggest reform to English property law for 40 years…”.
This announcement is the first welcome step in the implementation of the Law Commission’s recommendations, published last year, to make enfranchisement cheaper and simpler for leaseholders.
The announced reforms were widely reported in the general press, but not always with all due accuracy or understanding of the existing leasehold system. Pejorative and emotive terms such as “medieval” and “feudal” are increasingly used to describe our, admittedly somewhat complex, leasehold system as it has emerged and evolved over the centuries.
Background
The First World War saw the introduction of tenant-friendly legislation which restricted rents and limited landlord’s eviction rights. Facing dwindling profits from reduced rents and tenants who failed to pay their rent, landlords began to sell long leases for a lump sum and with modest annual ground rents, and so raising money while still retaining ownership of their property.
After the Second World War, Britain faced a serious housing crisis and, coupled with the fact that many property owners could no longer afford the upkeep of larger houses, many houses, particularly in urban areas, were converted into flats and sold on long leases, offering secure and affordable investments for many leaseholders and allowing property owners to retain the freehold.
And so our leasehold system was established. In 1966 the White Paper on leasehold reform was published setting out the Labour government’s intention to legislate to allow leaseholders with long leases of houses to acquire the freehold or a 50 year extension. The White Paper was based on the political proposition that the leasehold system was unfair to leaseholders and conferred benefits on landlords. The Leasehold Reform Act 1967 was enacted, initially for lower value houses, in order to correct the perceived social injustice. Further legislation followed, including the Leasehold Reform, Housing and Urban Development Act 1993, allowing leaseholders of flats to acquire extended leases or to get together with their fellow leaseholders to acquire the freehold.
The legislation has been amended so many times over the years that it has become complex and unwieldy, often making it difficult and expensive for leaseholders to exercise their rights. It was widely held that the law was being abused by landlords with deep pockets, and so in 2017 the Government considered reforming the system to make it easier and cheaper for tenants to obtain an extended lease or acquire the freehold. And so came about the Law Commission’s reports, one on valuation, published in January 2020, and the other on recommendations to make enfranchisement easier, published in July 2020.
Recent announcements
Last week’s announcements have had a mixed reaction. The proposed reforms include the following:
The right for house and flat owners to extend their leases to 990 years at zero ground rent and reduced costs Abolition of marriage value Zero ground rents on all new leases Prescribed rates for other elements of the premium calculation Development value to be avoided by leaseholders in collective claims in exchange for a restriction on further development An online calculator so that leaseholders can assess the likely premium A Commonhold Council, being a partnership of leasehold groups, industry and government that will prepare home owners and the market for the widespread take-up of Commonhold.
Whilst the reforms are certainly appealing to leaseholders, there has been much criticism from professionals practising in this field.
A casual reading of the press release might leave the impression that existing ground rents do not need to be bought out in lease extension claims, which is most unlikely to be the case.
Marriage value
Much attention has been attracted by the announcement that “marriage value” is to be abolished, but no other detail is given. Marriage value is an additional element of value released when the freehold and leasehold interests fall into the same ownership, which is effectively what happens when a leaseholder acquires an extended lease or the freehold. Specialist enfranchisement valuers have suggested that, if marriage value is abolished, prescribed rates for other elements of the calculation might be set to redress the balance so that landlords are properly compensated. This might have the unintended consequence in some cases of a leaseholder actually having to pay a higher premium than under the current regime.
The Government will be under pressure to ensure fairness for both landlords and tenants, and will be only too well aware of the potential for Human Rights challenges by landlords if they are not properly compensated. Marriage value may accordingly yet be retained in some other guise. There is even speculation that it may be retained in its existing form, but only be payable by investors, rather than home owners.
Development value
Development value is another aspect of enfranchisement valuation that has become particularly controversial, especially in recent years, with landlords advancing sophisticated arguments on development value at great expense through the tribunals. The proposal for leaseholders to avoid paying development value in exchange for a restriction on further development, whilst attractive to some leaseholders, may not find favour with others, who will be concerned about blighting the value of the freehold.
What now
The announcements have been derided as a “policy announcement with no policy”. All the Government has done is to announce what is intended to be on the agenda for reform this year. Nothing more.
The detail and timing of the changes are uncertain. It is however expected that the legislation will come in two parts, first in the upcoming session of Parliament to set future ground rents to zero in all new leases, but not existing ones. The rest of the reforms may follow, but there is no timetable or clear programme of reform. The widely held industry view is that these reforms may not be enacted for at least the next three to four years, and possibly under a different administration, having regard to the likelihood of landlord challenge.
If you have any queries or concerns about this matter, please contact our Berkshire Hathaway HomeServices Kay & Co, Sales Manager, Joe Le Beau
This article was originally published on Edwin Coe LLP
