If the recent Law Commission proposals for the reform of freehold enfranchisement become law, it will be the first significant change in residential leasehold law for nearly 20 years. V. Charles Ward analyses the potential impact on councils.
The right for a residential leaseholder to enfranchise did not even exist until the passing of Leasehold Reform Act 1967. But that only related to houses. It was another 26 years before a similar collective right to enfranchise was extended to the owners of leasehold flats and maisonettes by the Leasehold Reform Housing and Urban Development Act 1993. Running alongside the collective right to buy out a landlord’s freehold, are the rights which individual leaseholders have to extend their leases. However, it was the Commonhold and Leasehold Reform Act 2002 which increased leaseholder eligibility and made enfranchisement what it is today.
As the first wave of right-to-buy leases granted in the 1980’s shorten, statutory lease extensions has become an increasing workload for local authority housing officers and their lawyers. In fact, it must be assumed that all local authority leases previously granted under right-to-buy will one day need to be extended. So perhaps the peak has yet to come. Claims for freehold enfranchisement have always been rarer, perhaps because of the difficulties of getting the required majority of leaseholders on board – and keeping them on board for the duration of the transaction.
A feature of statutory freehold enfranchisement and lease-extension is that both parties have to work to a statutory timetable, which is front-loaded. This is particularly so for the corporate landlord receiving an initial notice from a leaseholder claiming the right to enfranchise or extend their lease. Leaseholders and their lawyers will have had as much time as they needed to get their claim together and prepare and serve their statutory notice containing their proposed terms of purchase. By contrast, the corporate landlord has only two months within which to formally respond with its counter-terms, failing which it may be bound by whatever terms the leaseholders had initially proposed. There is much to be done within those two months. Landlord-tasks include:
- Checking the legal validity of the leaseholders’ notice;
- Diary-in the two-month statutory deadline for service of the counter notice;
- Carrying out a due-diligence check of the landlord’s own title as well as the titles of each of the participating leaseholders and any intermediate landlord;
- Identifying and engaging with any intermediate landlords and determining whom amongst them is the ‘competent landlord’, who will respond formally to the initial notice;
- Commissioning a landlord valuation, to include valuations of any intermediate landlord interests;
- Deciding which of the leaseholders’ initial proposals can be accepted - and formulating sufficiently-detailed counter proposals for those which are disputed;
- Drafting and serving a valid counter-notice on the leaseholders’ representative within the two-month deadline.
Meeting the two-month statutory timetable is even more challenging during the current Coronavirus emergency when staff are working from home. Who is in the office to take immediate delivery of any formal notification received from any leaseholder? Systems must also be in place to ensure that the leaseholders’ initial notice reaches the right person. In a large council building, it is too easy for important legal documents to go astray. How do you carry out a landlord valuation when someone in the flat is shielding or self-isolating? There are special procedures to deal with that. But it does not exempt anyone from the two-month deadline.
Note also the limited rights which ground-landlords have to oppose freehold-enfranchisement where there is an imminent intention to redevelop as contained in section 23 of the Leasehold Reform Housing and Urban Development Act 1993. The ability to oppose enfranchisement on grounds of an intention to redevelop is limited because it can only apply when the residues of at least two-thirds of the qualifying leases have less than five years to run.
But it is not only right-to-buy leases to which the extension-rules apply. The right to extend or enfranchise could potentially apply to any residential lease granted by a local authority for more than 21 years, even if the premises were leased through an intermediary landlord.
A reason for the comparative rarity of freehold-enfranchisement claims compared with lease-extensions, might be that the process of enfranchising a larger local authority housing-block is simply too cumbersome for most leaseholders. Even to qualify for enfranchisement, at least two-thirds of those flats would have had to have been sold under right-to-buy and amongst that two-thirds, a majority of those leaseholders must be on board with the collective buying out of their freehold. Who is going to organize that? Where a block still contains flats owned by the local authority and let under secure tenancies, there will need to be a lease-back of those flats to the local authority.
Leaseholders will often approach local authorities regarding their wish to buy out their freeholds, without the need to go through a complex statutory process. Then the issue for the local authority is whether to negotiate a voluntary sale or to insist that it goes through the statutory process. My opinion is that voluntary enfranchisement is only workable for leasehold houses or perhaps a small block in which all the flats have previously been sold under right-to-buy and all the leaseholders have expressed their willingness to participate in the transaction. If any of those leaseholders has not expressed their participation in the request, the local authority would be duty-bound serve a statutory notice on every leaseholder under Section 5 of the Landlord and Tenant act 1987 giving those leaseholders the collective right of first-refusal. So what would be the saving?
Where voluntary enfranchisement is possible, there may be mutual advantages for both the landlord and the leaseholders. The advantage to the leaseholders is that they avoid the cost, delay and uncertainty of going through a statutory process. It may even save those leaseholders the costs of a professional valuation, which can be substantial. The advantage for the local authority is that it may be able to negotiate a higher price for its interest, in return for allowing the leaseholders to circumvent the costs, delay and inconvenience of a statutory process. So how are things likely to change if the Law Commission proposals become law?
It will certainly simplify matters by substituting a unified statutory regime in place of those currently existing under the 1967 and 1993 Acts. Relaxations in the qualifying criteria will make it easier for leaseholders to buy out their freeholds or extend their leases. Councils will no longer be deemed to have accepted leaseholder proposals if they do not provide valid counter-proposals within the statutory two-month deadline. Instead, there will be a general right for either party to apply to a first-tier tribunal to fix the terms. Lease-extensions would be for 990 years in place of the current 90 years for flats and 50 years for houses.
One final point. It must be stressed that statutory deadlines work both ways. Although councils have to work to statutory deadlines, there are also deadlines to which leaseholders must comply if their claims are not to fail. It follows that councils should not only diary up their own deadlines – but also those deadlines which apply to the leaseholders and insist on compliance with those deadlines. This is important because large-scale freehold-enfranchisement transactions have a tendency to drift and sometimes fizzle out – often because the leaseholders have not instructed lawyers with the required specialisations and are instead led by one of their own leaseholders, whom perhaps has some legal knowledge but not enough to steer the leaseholders through a complex legal process.