This article considers some of the enfranchisement options which are available to those leaseholders who may have fallen victim to the Ground Rent Scandal.
What is Enfranchisement?
- Simply put, enfranchisement is the process by which a leaseholder can apply for either an acquisition of the freehold or an extension of the lease.
Background: The legislative framework
- Under the current system, an existing leasehold homeowner acquires the right to enfranchise once they have owned the property for 2 years. The rights conferred upon them allow them to purchase the freehold, or obtain a one-off extension of the lease, which will add 50 years to the unexpired term of the lease if the property is a house (90 years if a flat).
- The current legislation governing enfranchisement is the product of a series of piecemeal changes and Acts of Parliament, which have resulted in a convoluted and often inconsistent regime, that has numerous anomalies and unintended consequences. The regime has come under harsh criticism recently for being inherently unfair to leaseholders.
- In December 2017, the Government published a summary of Communities Secretary Sajid Javid’s proposals to address the “practically feudal and unjustifiable” unfair practices in the leasehold market. The proposed reform includes measures to ban the sale of houses on a leasehold basis and leases that have an obligation to pay any money as ground rent.
- Whilst these prohibitions may effectively protect future homebuyers, they do not provide any protection or comfort for existing leaseholders.
- The December 2017 summary did, however, discuss the intentions for improving the current system to allow for cheaper and easier access to enfranchisement and the availability of better information regarding options for redress, for the existing leaseholders that are facing onerous terms.
- The Law Commission has since released a summary of their proposed solutions for leaseholders of houses, with the full consultation (covering houses and flats) due in Autumn 2018. The summary paper focuses on existing leaseholders’ enfranchisement rights, in response to the Government’s request that solutions for existing leaseholders be prioritised.
The Law Commission’s proposals are aimed at:
- simplifying the process by removing technical barriers and complexities in the rules
- replacing the right to a one-off 50-year extension with a high ground rent to a right to purchase unlimited extensions without ground rent, though the proposed period of extension is yet to be announced
- removal of the requirement that a leaseholder have owned their property for 2 years before making a claim
- improving the procedure, making it less likely for costly disputes to arise between the parties.
Also discussed in the summary is the premium that is currently payable by leaseholders to their freeholders when making a claim to enfranchise, and how that premium is calculated. The Law Commission is proposing to introduce one of two formulae for calculating the premium, both of which will meet their objective of reducing the premium.
Why is enfranchisement the solution?
- Enfranchisement offers the opportunity to convert a leasehold interest to a freehold interest. Alternatively, a leaseholder may wish to enfranchise to extend their lease. In doing so, the leaseholder is given the opportunity to renegotiate the terms of the lease, and free themselves from the burdensome terms.
- Whilst it is positive that these conversations and consultations are occurring at this high level, reform has and will continue to be a lengthy and gradual process. It is, therefore, not likely that the any of the proposals will come into effect before some years, especially while Brexit remains at the top of the agenda.
Why not wait?
- The proposals centre on making the enfranchisement process simpler, but do not state what redress there will be for existing leaseholders. Until the reform is rolled out, leaseholders will remain locked in their leasehold properties, obliged to comply with the onerous terms of the lease.
- Furthermore, though the premium may be reduced, it will still be a cost borne by existing leaseholders – a cost that future homeowners will not be encumbered with. Existing leaseholders may be able to free themselves from their leasehold traps, but they will have to pay to do so.
- It remains our position at FS Legal, that existing leaseholders were as innocent as future homebuyers and should not, therefore, have to suffer a loss to obtain equivalence.
- In bringing a claim in respect of the bad or negligent advice against the conveyancer, existing leaseholders could be provided with the sum required to meet the enfranchisement premium.
- However, those who decide to wait for reform, may find that they have lost the right to bring a claim if, when they come to bring that claim, more than six years have expired since purchasing the property. The law imposes a strict limitation on the amount of time that may elapse between the date of a cause of action arising and the claim being made. This was discussed in a previous article here.
FS Legal Solicitors