Buying freehold or extending lease under new law

It is widely accepted that leasehold ownership does not work in the best interests of leaseholders because the balance of power in existing leases, and the legislation that governs it, is too heavily weighted against leaseholders. This should change.

During the campaign last year for a change in the law, the main concerns outlined by leaseholders were:

• developers imposing onerous ground rent terms in the leases of newbuild flats and houses;
• high and opaque service charges and one-off bills;
• unfair permission charges;
• mis-selling of leasehold properties by developers;
• imbalance in dispute mechanisms;
• inadequate advice services; and
• unreasonable costs to enfranchise or extend leases.

On 20 March 2019 the Housing, Communities and Local Government Committee, (“the Committee”), published a White Paper making recommendations to the Government on leasehold reform. Professor Nick Hopkins, a member of the Law Commission, stated during the Committee’s inquiries “once the commonhold works for the needs that we have for development today we do not need long residential leases”. Indeed, the ideal outcome for many leaseholders would be the abolition of the leasehold system altogether.

The changes recommended to the Government by the Committee included a number of concrete measures aimed to reform and simplify the legislation in favour of leaseholders. In particular, the White Paper states that a ground rent should be considered onerous if it exceeds 0.1% of the value of the property or £250 (it is unclear how the choice between the two recommended options would be regulated). The recommended option of 0.1% for a flat worth £500,000, would set up the maximum annual ground rent at £50 a year. The recommendation for the newly established leases is the ground rent set at a peppercorn.

The recommendation to the Government was to make the new legislation compliant with human rights law. This means that freeholders may need to be compensated for any changes to the leases; however, the Law Commission has not recommended that such compensation should be made at full value. The Government’s current proposal is simply to reduce the premium payable to enfranchise.

In addition, the Committee has recommended the introduction of legislation that would restrict onerous permission fees in existing leases. Further, such permission fees may be considered to be unenforceable, if the Competition and Markets Authority indicates that these terms constitute ‘unfair terms’ under the Consumer Rights Act 2015.

The Committee has also recommended a standardised form of invoice for service charges. This would clearly identify the individual parts that make up the overall charge, and would have a threshold of £10,000 per leaseholder, above which works should proceed only with the consent of a majority of leaseholders in the building.

In addition, it has been recommended that freeholders should not be able to recover the tribunal’s costs through service charges.

Finally, and probably most importantly, the Committee has recommended that enfranchisement should become “substantially cheaper”. The Government’s objective is to make the process simpler, easier, quicker and cheaper for leaseholders. It is unclear whether the cost of enfranchisement would be a simple multiple of the reasonable ground rent under the lease or if the Government would come up with a more complex formula. However, the recommendation to make it “substantially cheaper” has been supported by both the Committee and the Law Commission.

It is intended to pass the new legislation in July 2019 and enforce the reform within the next nine months.