LEASEHOLD REFORM:
THE WAY FORWARD

• The Government has announced its intention to publish a draft Bill in the current session of Parliament on proposals for Commonhold and leasehold reform. This will provide a further opportunity for consultation on the detail. In outline, the Bill is likely to provide for the following changes to leasehold law.
  

Collective enfranchisement of flats

• We propose to simplify the existing qualifying rules for collective enfranchisement. In particular, we have concluded that the existing residence test whereby half the leaseholders who take part must have lived in their flats for the previous 12 months (or for periods totalling 3 years in the previous 10) should be abolished. Leaseholders see the residence test as a major barrier to enfranchisement, particularly for larger blocks where flats change hands frequently or are used as second homes or sub-let. Some landlords also require leases to be held by a company in order to block the right to enfranchise. This device would no longer be effective under our proposals.
• We propose to reduce the minimum proportion of leaseholders who must take part from two thirds to a half, subject to the group owning at least half of the flats in the block. Leaseholders in properties with non-residential use of up to 25% of the floor area would also be able to enfranchise compared with 10% at present.
• We have concluded that all leaseholders should have the right to take part in the enfranchisement process. At present, once a qualifying majority has been achieved, other leaseholders can be, and sometimes are, unfairly excluded. Thereafter, regardless of whether or not they participated in the enfranchisement, all leaseholders would have the right to take part in the subsequent management of the block.
• As regards the determination of the purchase price, many leaseholders have argued that the basis of valuation should be changed to one based on the value of the site alone, and that there should be no element of "marriage value" in the price. We have considered their arguments very carefully. But we have concluded that in a compulsory purchase leaseholders should be required to pay a fair market price for their freehold. We have to accept that the landlord has a share in the increase in the value of the property as a whole. In an open market sale where both parties were willing, the price would certainly reflect the fact that the joining of the leasehold and freehold interests would release additional value, and this additional value would be shared between the parties. However, we intend to simplify the valuation process and avoid scope for costly arguments.
• We have concluded that there should be a presumption that there is no marriage value where a lease has more than 90 years to run. In all other cases, it should be apportioned equally between the parties. We are currently carrying out research into the scope for using formulae to fix certain elements of the calculation of the price. We intend to adopt this approach to the extent that it is feasible. The right of appeal to the Lands Tribunal against decisions of leasehold valuation tribunals would be subject to leave being granted, to prevent abuse of the appeals procedure by deep pocketed landlords.
  

Leaseholders’ right to manage

• We propose to give leaseholders of flats a new right to manage their building. This proposal attracted widespread support from leaseholders who responded to the consultation paper. Leaseholders who meet the revised qualifying rules for enfranchisement would be able to take over the management without having to prove fault by the landlord and without payment of compensation. All qualifying leaseholders would have the right to join the managing body at any time.
• We recognise that, under this proposed right, unlike the position with enfranchisement, the landlord would retain an interest in the building. We therefore propose that the landlord would be entitled to membership of the managing body and the managing body would have a duty to take account of the landlord’s interest. The landlord or individual leaseholders would have the right to ask a leasehold valuation tribunal to appoint a new manager if the managing body failed to manage the building properly.
  

Improving management standards

• There was widespread support from all interests to the general principles proposed in the consultation paper for raising standards. In the draft Bill, we intend to provide for changes to accounting rules to achieve greater transparency and clarity. Landlords would be specifically required to keep service charge monies in designated client accounts. The responsibilities of auditors would be clarified.
• We are not yet ready to put forward specific proposals for regulating managing agents and others who manage property. We will be consulting further with interested parties in due course. If we conclude that further statutory measures are justified, we would aim to include them in the Bill before it is brought before Parliament.
  

Abuses of forfeiture procedure

• We propose to replace the existing forfeiture regime for residential long leases with a fairer regime for dealing with breaches of covenants. Determination of facts would be separated from repossession proceedings. Penalties for late payment of ground rent and other administration charges would have to be reasonable. Leaseholders would have the right to challenge the reasonableness of any such charge at a leasehold valuation tribunal. Ground rent would not be recoverable unless demanded, and there would be a period of grace before any additional charge could be made.
• We accept the need for effective sanctions against defaulters. But we do not believe it is right that a landlord can gain a windfall profit by obtaining absolute possession at the expense of the leaseholder. Instead, we propose that where the landlord obtains possession, the leaseholder should be compensated for the loss of his interest after deducting monies owed to the landlord.
  

Lease renewals for flats

• We propose to relax the qualifying conditions for the right to a new longer lease. The residence test would be abolished, enabling leaseholders who occupied flats as second homes to qualify. However, to prevent immediate windfall gains to speculators, the leaseholder would be required to hold the lease for a period of two years to qualify for the right. The estates of deceased leaseholders who would have qualified immediately before death would also be given the right for a limited period. Valuation rules and procedures would also be amended in line with relevant changes for collective enfranchisement.
  

Right of first refusal

• We propose to extend the right to houses. The current definition of qualifying tenant applies to regulated tenants as well as long leaseholders. We propose to further extend it to assured tenants, who have a similar long-term interest in the building, but not assured shorthold tenants. We also propose to extend the time limit for prosecutions for breaches of the provisions to 18 months, which is in line with the current time limit for issuing service charge demands.
  

Consultation on major works

• We propose to strengthen and simplify the existing consultation procedures for major works. Consultation would be required when the amount payable by any individual leaseholder exceeded a specified sum. The scope would be extended to cover, among other things, improvements where the cost of these is recoverable under the lease. Leaseholders would also be able to challenge the cost of these at a leasehold valuation tribunal.
  

Other rationalisation of leaseholders’ rights

• We propose to give new rights to leaseholders of houses who have extended their leases under the Leasehold Reform Act 1967. They would have the right to enfranchise and the right to an assured tenancy if the extended lease expires. We also propose to bring the procedures for enfranchisement of houses where the landlord cannot be found into line with those for flats.
• There remain a number of other inconsistencies in existing residential leasehold law. We intend to review these and if we conclude that changes are appropriate, we will aim to include them in the Bill before it is brought before Parliament.
  

Leasehold sheltered housing

• On the issue of management charges for leasehold schemes for the elderly, we have decided that some form of regulation of these charges is still needed. We are considering options on how best to take this forward as quickly as possible.
• We also want to introduce safeguards if leaseholders take over the management of sheltered housing by enfranchisement or the proposed right to manage. We see a danger that younger residents may decide to reduce the levels of service provided on cost grounds to the possible detriment of elderly or infirm residents. We will be consulting interested parties on how best to tackle this.

Conclusions

These proposals, if approved by Parliament, would represent a major improvement to the rights of existing leaseholders. With the proposals for Commonhold, which are being taken forward by the Lord Chancellor’s Department, they will go a long way towards ensuring that all home owners enjoy the same degree of security and control over their homes.