• 'a cap will also be introduced on ground rent payable when a leaseholder chooses to either extend their lease or become the freeholder’
• 'the government is abolishing prohibitive costs like 'marriage value' and set the calculation rates to ensure this is fairer, cheaper and more transparent.'
• 'leaseholders will also be able to voluntarily agree to a restriction on future development of their property to avoid paying "development value".'
The announcement confirms that legislation will be brought forward in the upcoming session of Parliament, to set future ground rents to zero and that 'this is the first part of seminal two-part reforming legislation in this Parliament – the government intends to bring forward a response to the remaining Law Commission recommendations, including commonhold, in due course'.
The press release follows on from a number of reports by the Law Commission—on 9 January 2020 it published a report setting out options to reduce the cost that leaseholders have to pay to buy the freehold or extend the lease of their homes, ie the premium. That report only concerned valuation reform.
On 21 July 2020, the Law Commission published reports on leasehold enfranchisement more generally, right to manage and commonhold.
The report from January 2020 on valuation put forward three key schemes for determining the premium, each of which were designed to make enfranchisement cheaper, saving leaseholders money. Each scheme uses a different method to determine the price of enfranchisement and allow further reforms to make the process simpler and to reduce uncertainty. Alongside the three schemes, the Law Commission put forward a range of other options for reform including:
• 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
It would appear from the press release that the government's proposals incorporate most of these suggestions, though detail is awaited.
On 21 July 2020, the Law Commission published reports on leasehold enfranchisement, right to manage and commonhold.
The leasehold reform report included the following:
• 'Under the current law, leaseholders of houses and flats enjoy different lease extension rights – and it is widely agreed that the right of leaseholders of flats is more favourable. There is no reason for leaseholders' rights to diverge in this manner, and we therefore recommend a uniform right to a lease extension for all qualifying leaseholders: the right to a lease extension, at a peppercorn (in effect, zero) ground rent, as often as they so wish, on payment of a premium…
• 'A lease extension of this length will place the vast majority of the home's value in the hands of the leaseholder, in line with the increasing prevalence of 999-year leases on the market, and will ensure that a lease only needs to be extended once. Our choice of 990 years rather than 999, however, reflects our recommendation in relation to redevelopment break rights for landlords. We recommend that a landlord should be entitled to obtain possession of the property, for the purposes of redevelopment, during the last 12 months of the term of the original lease or in the last five years of each period of 90 years after the commencement of the extended term...This will ensure consistency between a landlord's redevelopment break rights in respect of leases of flats extended by 90 years under the current law and in respect of leases extended under our new regime. This is important so that landlords are able to take possession of all units within a building at the same time where it is necessary for a property to be redeveloped. A lease extension of 990 years is preferable to one of 999 years for the same reason, being a multiple of 90 years.
• 'One of the three main elements of an enfranchisement premium is the term. Under each of the three schemes that we put forward, enfranchisement premiums would continue to include an amount to reflect the value of the term. The value of the term depends on the level of the ground rent. The higher the ground rent, the higher the premium. Some leases contain very high ground rents, or ground rents that will become very high in the future. Ground rents are generally considered to be onerous when they exceed 0.1% of the freehold value of the property. Currently, the existence of an onerous ground rent makes it particularly important for leaseholders to be able to exercise their enfranchisement rights in order to escape from the liability, but the presence of the onerous ground rent makes the enfranchisement premium very high.'
Again, it would appear from the government press release that it is taking up the Law Commission's proposals.
The press release also confirms that it is establishing a Commonhold Council - a partnership of leasehold groups, industry and government - that will prepare homeowners and the market for the widespread take-up of commonhold.
The Law Commission's report on Commonhold confirms:
• 'Commonhold was introduced in 2004 as a way of enabling the freehold ownership of flats which avoids the shortcomings of leasehold ownership. It is similar to structures used across the world. However, fewer than 20 commonhold developments have been established in England and Wales since the commonhold legislation came into force. Unlike practices in other countries across the world, flats continue to be owned, almost universally, on a leasehold basis. Flat owners in England and Wales continue to hold leasehold interests that will expire at some point in the future, and live in buildings where the landlord makes the key decisions about management and costs. Commonhold enables flats to be owned on a freehold basis so that owners' interests can last forever, and transfers decision making power to the homeowners.
• 'Our commonhold project seeks to identify why commonhold has failed to take off, despite its benefits, and to address problems with the law of commonhold which have been preventing its uptake.'
The government's announcement confirms:
'Professor Nick Hopkins, Commissioner for Property Law at the Law Commission said:
We are pleased to see government taking its first decisive step towards the implementation of the Law Commission's recommendations to make enfranchisement cheaper and simpler.
The creation of the Commonhold Council should help to reinvigorate commonhold, ensuring homeowners will be able to call their homes their own.'
Also: 'Further measures will be introduced to protect the elderly. The government has previously committed to restricting ground rents to zero for new leases to make the process fairer for leaseholders. This will also now apply to retirement leasehold properties (homes built specifically for older people), so purchasers of these homes have the same rights as other homeowners and are protected from uncertain and rip-off practices.'
This content was first published by LNB News / Lexis®Library, a LexisNexis® company, on 7 January 2021 and is published with permission. Further information can be found at: www.lexisnexis.com
Sources:
• Government reforms make it easier and cheaper for leaseholders to buy their homes
.tmb-mov69x69.jpg?sfvrsn=e3c4b2f1_1)
