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Leasehold & Freehold – What’s Changing?

The property market is a constantly evolving and dynamic marketplace. Leasehold and Freehold – Any field with heavy regulatory involvement brings with it a host of challenges. One of the challenges associated with this is making accurate predictions as to which direction the market is headed in.

Keeping an eye on the government’s current plans for reform is a great way of figuring out the best strategies you can implement to protect your capital.

The current government has begun a comprehensive reform regarding the legislation surrounding both leaseholds and freeholds. These reforms are entirely structured around both leaseholders’ rights and transparency. When they say “transparency”, it is regarding some of the more important aspects of property ownership. From the terms of a lease, through to some of the general legislation and legal issues that you should be conscious of moving forward.

Reform Specifics

So we’re already aware of the fact that the law is subject to reform and evaluation, but what’s actively being worked on?

At the beginning of this year, the law commission published their own report on leasehold enfranchisement.   This was largely in response to complaints frequently raised about the current legislation. These complaints are often fairly uniform in nature, too. Most complaints surrounding the current legislation tend to cite 1 of 3 major talking points:

  • The current legislation is too obfuscated
    The current legislation makes things too expensive
    The current legislation isn’t consistent enough

This report aimed to accomplish a few things. One of the main goals was to evaluate a leaseholder’s right to purchase the freehold for a particular property.

This report also evaluated leaseholders’ rights to group together to perform a block-purchase of a freehold, for example a group of flats.

Lease extensions were also being evaluated in order to make it easier to extend a lease for leaseholders.   One of the trickier aspects of policy making at this level is appropriately balancing the rights of both leaseholders and freeholders.

The Law Commission believes their proposals achieved an appropriate balance. These proposals would provide cheaper alternatives for leaseholders who wish to purchase a freehold whilst still ensuring landlords will be appropriately compensated for their properties.

Benefits of Reform

The Law Commission put forward a range of options to make it cheaper for leaseholders to buy their freehold or extend their lease. Not only a monetary issue, the options are to clarify and simplify the law, making the process of leasehold enfranchisement easier and less expensive to operate.

When speaking of enfranchisement, we mean that leaseholders (say of a block of flats) club together and buy the freehold of their building (not their individual properties). Once that “club” own the freehold (of the building), they are then in a position to extend their own individual property lease to 999 years (i.e. not have to renew again in their lifetime).

Further to this process, the Law Commission has put forward a range of other options for reform as well, such as:

  • Prescribing the rates used in calculating the price, to remove a key source of disputes, and make the process simpler, more certain and predictable.
  • Helping leaseholders with onerous ground rents, by capping the level of ground rent used to calculate the premium.
  • The creation of an online calculator for determining the premium to make it easier to find out the cost of enfranchisement, and reduce uncertainty around the process.
  • Enabling leaseholders who are collectively enfranchising a block of flats to avoid paying “development value” to the landlord unless and until they actually undertake further development.

Nb. Enfranchisement is different to Commonhold, which is a new form of property ownership (heavily used in the US and France already). It’s an alternative to the long leasehold system.

Leasehold Difficulties

Ground rents can actually pose difficulties in mortgaging a leasehold property.  Some properties effectively become impossible to sell and home owners are forced to stay in their current residence.   Homes that are retained on lease present a host of other challenges too – they’re difficult to mortgage due to escalating ground rents.  They also lose value over time.  Leasehold properties can lose up to 20 percent (20 %) of their original value whilst premiums skyrocket. The closer a lease crawls towards expiring – the more expensive it becomes to renew. This is why making it cheaper and easier to extend a lease is so vital – to give leaseholders the option to renew early and not wait until it’s far too late.

The Leasehold Advisory Service warned of these issues as far back as 2010, as such many people would consider a reform to be long overdue.

When Can We Expect To See Changes?

Work is still underway to finalize The Law Commission’s recommendations. You can expect to see the finalised report appearing in the spring of this year.

How long until you can expect to see the benefits of this implementation will vary. Surveys have been taken and a comprehensive analysis of the data has been performed. The information required to make sensible reforms is there – it’s now a simple case of ironing out the finer points of policy.

It’s important to remember that the published report is policy-neutral. It does not make specific recommendations for which policies to implement – it merely purveys a list of options to the current government. Which decision is undertaken will ultimately be decided in the houses of parliament.

Potential Roadblocks

One of the major challenges in drafting new legislation will be ensuring that it integrates with the rest of our laws. Human rights laws lay out some of the finer principles of property rights, and have done for quite some time. The human rights act was absorbed into English law in 1998.

Protocol 1 – Article 1 of this act clearly states:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

This clause can be invoked by any legal entity whose possessions have been affected by the state. This means that companies, as well as individuals, can invoke this right.

This means that any legislation that allows leaseholders to compulsorily obtain the freehold or extended lease for a particular flat/property would be in direct violation of a landlord’s human rights. The only way this does not violate a landlord’s rights is to ensure that the owner of the property is properly compensated to a fair level in return for the exchange of their property.

Keeping this in mind whilst policy changes are made will be absolutely critical in ensuring the success of any legislative changes in future.

Conclusion

In conclusion, legislative changes could be a win for both leaseholders and those seeking to become freeholders.

Leaseholding is a major financial commitment and poor oversight can result in you ending up out of pocket. Anyone who plans on purchasing a leasehold property should absolutely have a solicitor at hand, there are so many pitfalls that an untrained legal eye will miss.

The team here at LMP Law are passionate about helping property managing agents, block managers and leaseholders alike really understand their rights and protect against future issues. We will be able to ensure you’re completely aware of all of your responsibilities. We know that legal disputes can be incredibly costly so ensuring you’ve kept yourself protected from any future issues should be your number one priority.

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