Leasehold enfranchisement

Enfranchisement explained

Surveyors, lawyers and others involved in residential property are often instructed to advise on a range of matters affecting long leases of residential property. According to official statistics, there are nearly one million houses that are owned leasehold (rather than freehold). These are to be found predominantly in the Midlands and North-West of England but there are also significant concentrations of leasehold houses in Wales (from where the pressure for the original legislation sprang) and in London . Official statistics also suggest that there are nearly two million flats which are owned leasehold. As the building of blocks of flats has become an important feature of housing development in this country, the numbers of leasehold flats will continue to increase.

Residential leasehold law is a notoriously complex subject. Surveyors have to consult the Leasehold Reform Act 1967 for house leases; Part I of the Leasehold Reform, Housing and Urban Development Act 1993 for flat leases; the Landlord and Tenant Acts 1985 and 1987 for other features of leasehold management, and the Local Government and Housing Act 1989 for occupation rights at the end of a long lease. An additional source of complications lies in the numerous statutory amendments made to all of this legislation.

Decades after the legislation was enacted, the courts and the tribunals are still frequently asked to adjudicate disputes often involving very complex valuation and legal issues. In 2008, for example, there were no fewer than four cases that went to the House of Lords (now called the Supreme Court). Other leasehold issues are often adjudicated on by the Court of Appeal and the High Court. Leasehold matters are also a common type of litigation in the County Court, the Lands Tribunal (the Upper Tribunal (Lands Chamber) as it is now known) and the Leasehold Valuation Tribunal.

At the time of writing, there is an outstanding decision on valuing intermediate leases awaited from the Upper Tribunal, some statutory amendments to the house enfranchisement legislation came into force a few months before publication and the results of a departmental consultation on flat enfranchisement are awaited.

However well-drafted leases may be (and sadly, evidence and experience suggest that many leases are very poorly drafted), many leaseholders would prefer to have a greater degree of control over their homes, either through acquiring the freehold or, as the lease gets shorter, the ability to extend that lease. Landlords faced with a claim by a leaseholder to acquire the freehold, or a new lease, also need expert advice on questions such as whether the leaseholder is following the correct procedures and whether the leaseholder's proposals on price and costs are fair and reasonable.

In the most general of terms, the current position so far as residential leases of houses and flats are concerned is simple: the holder of a qualifying lease has a right to enfranchise and in many cases the right to a new lease. With limited exceptions, there is no residence test and a lease usually qualifies if it was originally granted for a term longer than 21 years.

House leases

Now just over 40 years old, the Leasehold Reform Act 1967 is the landmark legislation in enfranchisement claims. For the first time in English law, a qualifying leaseholder of a house was given the right to purchase the freehold (through a process that is now commonly known as 'enfranchisement') and also the right to an extended lease 50 years longer than the current term. Unlike the later leasehold legislation, this original measure was quite controversial, both during its parliamentary passage and later. In a famous challenge to the validity of the legislation, one landlord took proceedings in the European Court of Justice (see James v United Kingdom (1986) 8 EHRR123), arguing that there had been a breach of Article 6 of the European Convention on Human Rights by allowing a leaseholder to compulsorily acquire the freehold whether the landlord was willing to sell or not. The challenge was unsuccessful, the court holding that signatory state legislatures must be accorded a wide margin of discretion in framing legislation that has a defined social need. In this case, the social need was to give rights to residential leaseholders of houses, whose leases are coming to an end, and who have no rights at the end of the lease, unless the landlord is willing to grant them a new lease. As it was originally enacted, the legislation applied only to qualifying leases of houses of lower value (formerly known as rateable values). Higher value dwellings were, therefore, excluded. A brief history of the amendments since 1967 may assist in understanding the current statutory framework.

How the Leasehold Reform Act 1967 has been amended

Part I of the Leasehold Reform Act 1967 (most of which came into force on 1 January 1968), gives the right to compulsorily acquire the freehold, or to obtain an extension for a further 50 years term. As originally enacted, a lessee qualified if he had a long lease (broadly speaking, a lease which was originally granted for a term longer than 21 years), at a low rent, having occupied the house as his only or main residence for the past five years, or for periods totalling five years during the past ten years. Enfranchisement was limited to houses with lower rateable values: higher value houses were originally excluded from the right to enfranchise.

Amendments to the Leasehold Reform Act 1967

The original legislation has been amended on several occasions. Some amendments are of a technical nature; others (such as extending the numbers of houses that qualify), are more substantial.

In 1969, technical changes were made to valuation (s.82 of the Housing Act 1969). More substantial amendments followed with the passage of the Housing Act 1974, which extended the number of eligible houses by increasing the rateable value limits for enfranchisement (but allowing a more generous basis for valuation for such houses). These amendments also made provision for landlords to apply for an estate management scheme ( EMS ) to be approved. This allowed landlords with a portfolio of leasehold houses to apply for such a scheme to be registered. Under an EMS , a landlord can retain rights over properties even though some of the leaseholders have acquired the freehold.

Amendments were also made to valuation to take account of any increase in value caused by improvements carried out by the lessee or any previous lessee. Any increase in value is to be discounted in assessing the price payable for the freehold.

The Leasehold Reform Act 1979 was introduced to prevent landlords from artificially increasing the price payable on enfranchisement by a device which had been upheld in litigation by the House of Lords in a case called Jones v Wrotham Park Settled Estates [1979] 38 P&CR 77.

The next set of amendments were contained in the Housing Act 1980 (legislation which is best known for the introduction of the right to buy, security of tenure and other new statutory rights, for tenants of local authorities and other public sector landlords). It amended the Leasehold Reform Act 1967 by reducing the five-year qualification period to three years. Certain types of shared ownership leases (under which tenants purchase part of an interest in the house, paying a rent and having the right to purchase further interests in the property), became excluded from enfranchisement.

Leasehold Valuation Tribunals (LVTs) were created to deal with disputes over valuation in place of the Lands Tribunal, whilst allowing an appeal to the Lands Tribunal against their decisions. Other minor amendments were also made, including a change to the definition of a long lease (to combat an avoidance device), and a change to the way in which intermediate leases were valued on enfranchisement.

Further changes (of a technical character) were made by the Housing and Planning Act 1986 to prevent lessees from taking advantage of a quirk in the 1967 Act which allowed them (in effect), to purchase more cheaply by combining an application to extend the lease with a claim to acquire the freehold. Also, the statutory basis on which some shared ownership leases are excluded from enfranchisement was reformulated.

Substantial amendments were made to the Leasehold Reform Act 1967 by the Leasehold Reform, Housing and Urban Development Act 1993. Perhaps the most important change was the removal of the higher rateable value limits thus bringing all otherwise eligible leasehold houses within enfranchisement under the 1967 Act. The major leasehold changes made by the 1993 Act also introduced the collective right to enfranchise for flat leaseholders and an individual right to a new lease.

As might be expected, a different valuation basis was introduced for house leases, which now qualified (including the landlord's right to receive additional compensation for any additional losses, such as a loss of development value following enfranchisement).

The numbers of qualifying leases were extended by changes to the low rent test condition and changes made to the definition of long leases so as to include certain leases which terminate after death or marriage. But house leases granted by charitable housing trusts, and houses transferred for the public benefit, became excluded from enfranchisement. Landlords were given new rights to apply for an EMS in relation to houses which became eligible for enfranchisement under these amendments, and the procedures for the approval of such schemes were greatly simplified.

Further amendments were made to the 1967 Act by the Housing Act 1996. The most substantial change was the reform to the low rent test by rendering leases which failed the test, qualifying leases, provided they were originally granted for a period of more than 35 years. Reforms were also made to cases where a dwelling failed the low rent test because it did not have a rateable value at the date on which the test is applied. Once again, the landlord's right to apply for an EMS to be approved was extended to cases where house leases became enfranchiseable following these amendments; however, the low rent test was not abolished for shared ownership leases granted by registered social landlords. [The position was simplified by amendments under the Housing and Regeneration Act, Part 3, which came into force on 9 September 2009.]

Landlords were also given a new right to compensation where an ineffective enfranchisement claim was made at the end of the term of the lease. The lessee becomes a statutory tenant or an assured tenant and the landlord loses the increased rent whilst the enfranchisement claim is pending. LVTs were also given jurisdiction to determine the costs payable by the enfranchising lessee when the parties fail to agree them.

A substantial number of changes were made to the 1967 Act by Part 2 of the Commonhold and Leasehold Reform Act 2002 (plus major changes for flat lease enfranchisement rights, and radical new leasehold management provisions, such as new service charge consultation procedures). These changes included the virtual repeal of the residence qualifying condition and this has paved the way for investors to exercise rights. Another change was to allow leaseholders who have the right to an extended lease, the right to enfranchise and the right to an assured tenancy at the end of that extended lease. Before these amendments, a leaseholder with an extended lease had no right to enfranchise or to stay in the house under a statutory tenancy once the extended period had started. This may make the right to an extended lease more attractive than was previously the case. Another change is procedural; applications in relation to missing landlords can now be made to the County Court (and not the High Court as was previously the case).

Additional amendments were recently made by Part 3 of the Housing and Regeneration Act 2008. These changes repeal the remaining vestiges of the low rent test, except that it remains a qualifying condition for extended lease claims. Schedule 4A to the 1967 Act has been amended to allow all landlords (not just social landlords), to grant shared ownership leases, which will not qualify for enfranchisement unless the leaseholder has first acquired 100 per cent of the equity. Also, under regulations, shared ownership leases in prescribed protected areas will remain social housing. A shared ownership leaseholder of a house in such a protected area will either not have the right to acquire the whole of the equity, or will be required to offer the house to the landlord before selling it. These amendments came into force on 9 September 2009 and apply only to leases granted on or after this date.

Summary of these amendments

The effects of these reforms have (a) removed the higher value exclusions for house leases, with the result that all houses held on qualifying leases can enfranchise, and (b) have simplified the qualifying rules by such matters as abolishing the low rent tests and the residence test for qualification. However, it is very important to note that as more and more house leases became enfranchiseable so the valuation bases changed in a way that favoured landlords. This accounts for the section 9(1) valuation based on 'site value' for leases which originally qualified in 1967, and sections 9(1A) and 9(1C) which require payment of 'marriage value'. The 2002 Act also simplified marriage value by amendments to the 1967 Act: in all cases any marriage value is shared 50:50 except where the term of the current lease exceeds 80 years, in which case the marriage value is treated as nil. It should also be noted that the right to an extended lease only applies if the original qualifying conditions (e.g. rateable value, low rent test and so on), apply. In other words, the reforms that have allowed more houses to qualify for enfranchisement have not included the right to an extended lease.

Extract from Leasehold enfranchisement explained by Ellodie Gibbons, barrister at Tanfield Chambers; James Wilson, partner at WA Ellis; and Professor James Driscoll (published May 2010).

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