Radical thinking on enfranchisement
3rd December 2015
The law of enfranchisement is very complicated. A whole industry has evolved to try to interpret the provisions of the Leasehold Reform Act 1967 (“the 1967 Act”) and the Leasehold Reform Housing and Urban Development Act 1993 (“the 1993 Act”) and put them into practice. The cost and frustration to leaseholders of such a convoluted process is considerable.
At the autumn conference of the Association of Leasehold Enfranchisement Practitioners (“ALEP”) in October, Joshua Rozenberg chaired a fascinating debate entitled “Further leasehold reform – radical thinking”. The debate was based on a paper prepared by Philip Rainey QC for an all-party meeting in January which can be found on the ALEP website. Perhaps not all of this “blue-sky” thinking would work in practice, but the debate certainly highlighted the deficiencies in the current system and the need for reform.
Why do we need enfranchisement?
In English Law, positive covenants do not run with freehold land. In a multi-occupancy building – for example, a block of flats – it will always be necessary to impose obligations on occupiers to ensure that they can all coexist in harmony. This is done is by requiring each tenant to enter into a contract – the lease – with a mutual landlord who is responsible for enforcing those obligations.
The leasehold system gives rise to two primary difficulties. The first is that a lease is a wasting asset. The second is the lack of control which the lessee has over the management and repair of his building. Rather than cure the leasehold system of its defects, the law of enfranchisement seeks to treat the symptoms, by allowing tenants to either extend their leases or acquire the freehold of their building.
As enfranchisement is a form of compulsory purchase, the legislation requires the leaseholder to pay the market price for the privilege and contains detailed provisions as to how that price should be calculated. The concept is fairly simple, but a rigid procedure coupled with repeated tinkering with the legislation has led to many an application failing or proving prohibitively expensive.
The “wasting asset” problem
One way around this problem would be to require any new leases to be either less than 21 years or more than 999 years. Existing leases of, say, 125 years or more could be automatically converted into 999-year terms. Lease extensions would then not be needed and there would be no reversionary value. Readers of my February column (EG, 7 February, p102) will recall that reforms along these lines have been enacted in Scotland, with landlords being entitled to compensation for their loss.
Alternatively, lease extensions could be for 999 years rather than 90 years to avoid the need for second extensions. Similarly, is there still any need to retain the right to a lease extension of a house under the 1967 Act when most lessees will opt to acquire the freehold? Could this part of the Act be abolished?
The management control problem
A lease always requires the payment of rent and usually contains service charge provisions to cover the cost to the landlord of managing and maintaining the building. Payment of rent is inconsistent with the concept of ownership and a draconian review provision can significantly reduce the value of the asset. Under the 1993 Act, the new extended lease is granted at a peppercorn rent and the landlord is compensated for the loss of the rental stream. A similar rent restriction could be placed on new leases. No doubt the premium would be increased accordingly, but at least lessees would have certainty.
Despite numerous statutory protections in relation to service charges, lessees still have no ultimate control over the management of their building unless they enfranchise or exercise the right to manage (“RTM”). This right could be made more attractive by simplifying the procedure for acquisition. Even if the lessees do acquire or take over management of the building, the average tenant is unlikely to be able to successfully navigate his way through the statutory maze of controls on management and restrictions on the recovery of service charges and administration fees. If the landlord and tenant are the same people wearing different hats, disputes might be reduced by relaxing the requirements.
Does the procedure need to be so tricky?
The current legislation is certainly not user-friendly. It is littered with sections which have never been brought into force and concepts which are now long out of date, for example, basing the low rent test on rateable values.
It would be a brave lessee who would embark on an enfranchisement without professional help. The 1993 Act procedure is riddled with “trap” notice requirements and time limits with no power of extension. Non-compliance has catastrophic consequences for the landlord or tenant who trips up. If a deadline is missed by a tenant, the initial notice may be deemed withdrawn and no subsequent notice may be served for 12 months. If the landlord fails to serve a valid counter-notice, the tenant(s) can acquire a new lease or enfranchise on the terms set out in their notice irrespective of whether these are fair.
Are these strict requirements really necessary or are they more trouble than they are worth? The law of enfranchisement is certainly fertile ground for lawyers and surveyors, but maybe the time has come to overhaul the existing regime and replace it with a single Act containing a simplified procedure. There does not seem to be much political appetite for reform, but a little bit of blue-sky thinking never hurts.
Philip Rainey QC’s paper can be found here.
This was first published in the Gazette Estate on the 21st November 2015.