This is our detailed response to the recent publication of the Law Commission’s leasehold reform proposals.
Whilst we welcome any changes that will make leasehold fairer for leaseholders, we were genuinely surprised by the optimism with which much of the media greeted the Law Commission’s proposed ‘solutions’. As a campaigning voice for leaseholders – and unconflicted by freeholder clients as we don’t have any – we believe we have a duty of care to all the leaseholders in the country to provide a more honest account of the proposals than the media provided. Having reviewed the summary document in detail we are far from optimistic for leaseholders.
On 18 July, the Law Commission announced several recommendations to help the owners of leasehold houses, including: simplifying the enfranchisement regime; giving leasehold house owners the right to purchase longer extensions to their lease without a ground rent; and enabling the owners of leasehold houses on estates with shared services to pursue collective enfranchisement. Although the Government promised in December 2017 to make sweeping changes to the leasehold system in order to make the process simpler, quicker and cheaper for leaseholders, these proposals therefore really do amount to little more than window dressing.
Our concerns on behalf of leaseholders
Our main concern is that the document gives far too much weight to freeholders’ legal rights by promising to ‘keep in mind the interests of landlords who would be affected by reforms which lower the premium paid by leaseholders’. This very much suggests that compensation will still be in the landlords’ favour and the proposals and announcement are therefore contradictory. By committing to ensure that ‘sufficient compensation’ is paid to landlords, the Law Commission has been unable to propose the radical reforms needed to make leasehold enfranchisement significantly cheaper and easier for leaseholders.
Some of the proposals are very vague, such as the promise to ‘remove technical barriers and complexities’, while we believe that other recommendations will simply be unworkable in practice, including several of the options outlined to improve valuation methods.
It is also disappointing that the Law Commission is proposing to simply tinker with existing legislation when more radical reform is needed. Leasehold Solutions has been campaigning for leaseholders’ rights since 2002 and knows that whenever reforms are made in a piecemeal fashion, the result is multi-millionaire freeholders and their cunning lawyers challenging reform at every stage, thus thwarting attempts to improve the system for leaseholders. We believe that just tinkering around the edges will just allow this cycle to repeat itself, wasting millions of pounds of leaseholders’ money in lengthy legal battles.
The Law Commission will launch a detailed consultation on a new enfranchisement regime in respect of leasehold houses and flats in September, before publishing its final report in 2019. We hope that the following analysis – based on our wide experience of managing thousands of leasehold extensions and hundreds of freehold acquisitions – will be taken into consideration in the next phase of consultation.
1.10(1): ‘removing technical barriers and complexities in the rules governing eligibility for enfranchisement rights where these unjustifiably prevent some leaseholders of houses from exercising enfranchisement rights;’
We think ‘removing technical barriers and complexities in the rules governing eligibility’ is rather vague and further work is required to identify what these barriers and complexities are and how they can be removed.
1.10(2): ‘replacing the current right of leaseholders of houses to purchase a one-off 50- year lease extension at a high ground rent, with a right to purchase unlimited longer lease extensions without a ground rent – we will consult on the period of the extension, which could be, for example, 125 years or 250 years;’
We believe that the offer to extend the current entitlement to a 50-year lease extension to either 125 years or 250 years is largely pointless. Given that the cost of purchasing the freehold of a house is akin to extending the lease, we believe that lease extensions on leasehold houses should be scrapped and all leasehold house owners should be given the opportunity to purchase the freehold, coupled with the ‘Right of First Refusal.’ This would discourage property developers from building needless leasehold houses in the first place.
1.10(3): ‘enhancing enfranchisement rights for owners of leasehold houses on estates with shared services, through proper provision for the continuation of such services and the additional ability for the estate to be enfranchised as a whole’
We advise caution here as there is lots of scope for freeholder tricks. Such a set-up is fraught with risk, for example leaseholders have the potential to be charged twice: firstly, by the Council through Council Tax and then by the developers who could still own the unadopted roads.
We would wish to see legislation introduced that would give leaseholders a legal right to take over the management of estate charges held by way of rent charges. This is a burgeoning market for professional investors and a profitable revenue stream for them. We would like to see legislation changed to allow leaseholders to take control of their own estates to prevent this becoming the future battleground with the asset classes who intend to own these rent charges able to earn unnecessary fees from leaseholders.
1.10(4): ‘removing the requirement that leaseholders must have owned the lease of their house for two years before making a claim…’
We wholeheartedly agree with the proposal to remove the two-year ownership requirement. This should also be applied to owners of leasehold flats. We also believe that the Right of First Refusal should immediately apply to leasehold houses. This would instantly remove the attractiveness for developers to build onerous clauses into leases as revenue generating incomes and selling them to third party ground rent investors.
1.10(5): ‘improving and simplifying the enfranchisement procedure, so that it contains fewer traps for the owners of leasehold houses, is easier to operate, and is less likely to result in protracted and costly disputes between the parties’.
We note the use of the phrase ‘fewer traps’ – we find this terminology concerning and would advise that all known traps should be removed, as there is no justification for maintaining the use of any trap that can unfairly disadvantage leaseholders.
1.12(1): ‘Option 1: the introduction of a simple formula for calculating the premium, which is not based on the market value of the interest being acquired by the tenant..’
Given that the calculation at present is very complicated, it sounds rather vague to talk of ‘the introduction of a simple formula for calculating the premium’. It is easy to think of examples that would make a mockery of such simple changes.
2.24: ‘There is no suggestion that existing leaseholders should be able to obtain a freehold or lease extension without paying the landlord an appropriate price; our task is to propose reforms to improve the enfranchisement process, and to set out the options for reducing premiums that are payable by leaseholders while ensuring sufficient compensation is paid to landlords.’
It is worth noting that the document states that the Law Commission must ‘[ensure] sufficient compensation is paid to landlords’. This suggests to us that no one is intending to allow the consideration to be significantly reduced and therefore ‘compensation’ will still favour the landlords, i.e. the freeholders.
Leaseholders have for a long time suffered at the hands of rapacious freeholders and their machinations to extract more money. We believe this has gone on for long enough and it is time that more concentration was focussed on the human rights of leaseholders. Freeholders have made enough money from the leasehold system.
For us this is the most concerning part of the Law Commission’s proposal. It is impossible to make the leasehold extension process ‘easier, cheaper and more transparent’ without affecting how the freeholders are currently compensated. Therefore, this seems worryingly contradictory.
3.10: ‘Second, a right to a longer lease extension – for example, 125 or 250 years – with no ground rent. There would be no limit on the number of lease extensions that can be obtained.’
This point proposes a right to a longer lease extension for leasehold houses. Please note that under the 1967 Act, the freeholder is able to include a ‘modern’ ground rent and we know from our vast experience that ‘modern’ ground rents are inflated and often onerous.
3.11: ‘Third, leaseholders of houses will also be able to participate in a new enfranchisement right enabling leaseholders on an estate comprising multiple buildings to purchase collectively the freehold of the estate – whether those buildings are houses or blocks of flats or a combination of the two.’
Owners of leasehold houses will be able to participate in a freehold purchase that includes flats and commercial premises. Currently that is not possible. Plus, there may be an option for owners of leasehold houses to join an estate-wide freehold purchase retrospectively.
3.14(1): ‘the replacement of the current two-track approach to the question of availability of enfranchisement rights (which requires premises to be categorised as a “house” or “flat”) with a single coherent set of criteria (based around the new concept of a “residential unit”, which can be applied to any leasehold premises)’
The leasehold world cannot define a house – yet the report suggests that the two-track approach to enfranchisement rights for houses and flats should be categorised simply as a ‘residential unit’. This does not deal with what is above or below, in the case of flats. A house does not have anything above or below, whilst a flat does, and so it seems likely that two categories of ‘residential unit’ would be required.
Also, in order to define a residential unit, one would first need to define what a house is, and as the leasehold community can’t easily define a house, the definition of a residential unit will also not be straightforward.
3.19: ‘In our Consultation Paper, we will propose a single simplified procedure that would apply to all residential units (whether houses or flats) regardless of the enfranchisement right being claimed. The key features of this proposed procedure would solve problems under the current law by: (1) providing standard, and simpler, forms for commencing an enfranchisement claim, making the process easier and simpler; (2) allowing leaseholders to give claim notices to their landlord at specified categories of addresses, and deeming the landlord to have been properly served at such an address.’
We welcome the attempt to make the process of serving Notices easier, for example (2), which proposes that the leaseholder need only serve the freeholder a Notice at one address.
Currently there is a considerable amount of game playing from freeholders who are happy to obfuscate the correct address to serve Notice for the sole purpose of denying the validity of a Notice claim. This has to stop.
3.19 (3): ‘where leaseholders are unable to give claim notices to their landlord at a specified category of address, allowing them to apply to the Tribunal so that the claim can still proceed’
We agree with the suggestion that the FtT should look after all cases and that there should be no requirement for County Court involvement.
3.20: ‘We will also consult on whether leaseholders should be required to contribute to their landlord’s non-litigation costs of dealing with a claim. If that requirement is retained, we will set out options for reforming the way in which any such contributions might be set, and will also outline a potential fixed-costs regime.’
We support the proposal to make the payment of freeholders’ costs more transparent and even fixed or hopefully non-existent. There is currently much abuse in this area.
Currently leaseholders are legally obliged to pay the ‘reasonable’ legal and valuation fees (their Section 60 costs) of their freeholder when extending their lease. This is a needless provision and it is just another tier of fees that must be borne by leaseholders. It is also a provision that is regularly abused by the freeholder’s professional advisers.
Freeholders’ solicitors and valuers regularly ask for eye-watering fees for dealing with the lease extension and the onus falls to the leaseholders to challenge their reasonableness. This happens in the vast majority of cases we deal with on behalf of leaseholders. How can this be fair or allowed to continue?
There are worse abuses than this though with Section 60 costs. Professionals will often take totally unrealistic positions on the premium of a lease extension and threaten that the leaseholder must take them to the First tier Tribunal if they do not agree with the premium they request. Then suddenly they will offer a figure that is higher than it should be but the leaseholders will accept to avoid the huge fees of attending the FtT.
The solicitor will then insist that the leaseholder must first agree to pay their full Section 60 costs BEFORE they will agree the premium. This means the leaseholders lose their right to challenge the fees or face a Tribunal case. This is unscrupulous and clearly goes against the spirit of the Act.
In a recent case a solicitor acting for a large central London charity freeholder used this ploy to make the leaseholders agree to their Section costs of over £14,000 each! This is blackmail pure and simple.
There is no valid reason that leaseholders should have to pay the premium of a lease extension as well as the inflated Section 60 costs of the professionals acting for their freeholder. This should be scrapped in the Law Commission’s proposals.
4.21: ‘In order to make enfranchisement easier, quicker and more cost effective (by reducing the legal and other associated costs), we provisionally consider that the valuation provisions could be supported by an online calculator.’
We welcome changes that could be made to the current way lease extension premiums are calculated. They are complex, archaic and indecipherable to the vast majority of leaseholders. The fact that a leaseholder must pay a professional valuer to be able to calculate the dark art of lease extensions is a damning indictment of the leasehold system.
Therefore, an online calculator would be a positive step forward as long as the various parts of the equations decided on were fair and not weighted towards the freeholders as has been the case for many decades.
4.26: ‘It would be possible to calculate the enfranchisement premium by reference to the ground rent. A Private Member’s Bill has been introduced into Parliament to introduce a maximum enfranchisement premium for leaseholders purchasing the freehold of ten times the ground rent’:
We welcome the proposal to introduce a maximum enfranchisement premium for leaseholders purchasing the freehold.
Altering the current complex calculations for a lease extension to one that is a multiple of the current ground rent is by far the simplest and fairest method proposed by the Law Commission. This would make the calculation simple for all and one that would reduce the premiums due to the millionaire freeholders who have profited from this unfair system.
We cannot recommend this proposal enough.
4.32: ‘It would be possible to calculate the enfranchisement premium by reference to the ground rent. A Private Member’s Bill has been introduced into Parliament to introduce a maximum enfranchisement premium for leaseholders purchasing the freehold of ten times the ground rent:’
Where there is a very long reversion, the recommendations suggest there could be scope for prescribing the capitalisation and deferment rate.
We would welcome the prescription of the capitalisation rate as long as the rate agreed upon was a fair one. Capitalisation rates have become the new battle ground which sees freeholders and large pension funds currently spending a disproportionate amount to establish in Tribunal very low cap rates.
There is currently little case law on cap rates and the freeholders are desperate to set new case law which favours their portfolios. It would also act to dissuade the Government from prescribing cap rates as they would be forced to compensate freeholders for their loss of income under human rights legislation.
If this is allowed to happen it would also have catastrophic consequences for any leasehold house or flat which currently has an onerous ground rent.
There was a recent case in Tribunal where a pension fund tried to achieve a cap rate of 3.09%. The intermediate freeholders won and the FtT decided the capitalisation rate should be 3.35%.
To put this in some kind of context, if a house is worth £160,000 and the ground rent increases with RPI every ten years, the cost of the lease extension would be:
- Cost of lease extension with an RPI with a cap rate of 7% = £9,750
- Cost of lease extension with an RPI with a cap rate of 3.35% = £21,250
If the same example above but the ground rent doubles every ten years then the cost of the lease extension would be:
- Cost of lease extension with an RPI with a cap rate of 7% = £22,750
- Cost of lease extension with an RPI with a cap rate of 3.35% = £90,000
Therefore, this option of prescribing the capitalisation rate as a fairer option relies totally on the percentage agreed.
4.50: ‘In effect, the deferment rate has been prescribed since the decision in Sportelli. However, it is still subject to dispute, particularly in respect of properties outside London, and before long it may be argued that changes in the market since the decision in Sportelli justify the issue of the deferment rate being revisited as a whole. Consequently, prescribing a deferment rate ought to simplify the valuation process and, again, can be used as a way of reducing premiums.’
The Law Commission suggests prescribing a deferment rate to simplify the valuation process. The deferment rate is used when calculating the reversionary element of a lease extension. This rate has remained unchallenged since the Sportelli case in 2008 which set this rate at 5% in prime central London.
There is much evidence that proves that freeholders are preparing to challenge this rate to ensure they get even more money from leaseholders.
There is however a huge injustice in the calculation of the deferment rate which has not been adequately addressed. That of the value of tenant’s improvements to the property and the fact that freeholders unfairly benefit from these improvements in full.
For example: Imagine a freeholder bought the freehold of a block of flats in London in the 60s. He may have paid a modest sum for it. At the time of purchase those flats may have been worth £60,000 each.
The flats may have had a primitive kitchen and décor. The internal electrical circuits may have consisted of one plug socket each room. Over the years the leaseholders have updated the flat and put in new kitchens and bathrooms. They will have paid to completely update the electrics and plumbing in the property. The flat is now considered a desirable London property worth a £1million. All these improvements though have been paid for by the leaseholder.
When it comes to calculating the reversionary interest of the freeholder though we use the current value of £1 million. It is hugely unfair that the freeholders, who have contributed nothing to this value increase, should profit from it.
There is not a plan to recognise this unjust aspect in the Law Commission’s proposal but it could be recognised in the prescription of the deferment rate by making it much higher than Sportelli dictates.
In the Law Commission’s proposals, especially in terms of the solutions to simplify valuation methods, we are convinced that prescribing 10% of the property value for the premium will not fly. However, we expect that they will try to prescribe capitalisation and deferment rates.
Although a proposal is that the lease extension premium be simply altered to 10% of the property value, this is not a viable option. It would not result in a fair premium for a high percentage of leaseholders. Also it would be impossible to establish an uncontested value for a property which would result in freeholders investing huge effort to argue higher property values based on their ‘research.’
Omissions from the proposals we believe should be included:
The role of the First tier Tribunal
There is an unjust element that is currently hidden which involves the rules around how the FtT can be used. It happens on a daily basis and is used by freeholders to extract more money than is fair for a lease extension.
That is the threat of going to the Tribunal.
Freeholders do not fear going to the Tribunal as the costs involved in doing so can be tax deductible expenses for their business. Also they are keen to set legal ‘precedents’ which will benefit their whole portfolio.
Leaseholders, however, are interested only in paying a fair price for a lease extension for their home. This then becomes a ‘David and Goliath’ battle. If a freeholder refuses to negotiate a fair price for a lease extension, a leaseholder will be forced to investigate the cost of attending the Tribunal.
They will need to pay a solicitor to represent them and possibly a valuer if it is a valuation issue. Freeholders will usually use the services of a barrister to argue their case and so the leaseholder will also need one too. The total fees for this for one day are staggeringly high and their case may be listed for two days in the Tribunal, thus doubling the cost.
Also, if the freeholder loses he may appeal the case to the Upper Tribunal and the leaseholder would have to pay all over again. Although there is now a case for the leaseholder to be able to claim ‘wasted costs’ for the needless litigation of their freeholder, this has proved to be a toothless ruling and to date no meaningful costs have been awarded against freeholders.
Once a leaseholder calculates these fees they are understandably keen to avoid this scenario. Freeholders will simply use this threat to extract more money than is fair for the lease extension and, as we discussed previously, increased Section 60 costs.
We suggest that this is looked at in detail by the Law Commission as this is the cause of much hidden injustice, the effects of which are considerable, unjust and invisible to those wishing to examine the abuses of leasehold.
This is not our definitive list of changes we would like to see to the unbalanced leasehold system. We will be providing this when we respond to the Law Commission’s full consultation that is due later in the year.
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