Enfranchisement is the gaping hole in the leasehold reforms and there is a very good reason for this, writes Sebastian O’Kelly.
When government decides what it is going to prescribe it will be firing the starting pistol for the freeholders to start whinging again and threatening judicial reviews over lost revenues.
So enfranchisment and the means to make commonhold conversion low cost and attractive to existing leasehold blocks of flats are absent, and likely to remain so until this Bill is well advanced.
Leaseholders are understandably confused that it is missing as enfranchisement is one of the five stated objectives of the current Bill , alongside reinvigorating commonhold, tackling existing ground rents, ending forfeiture, and bringing the injustice of ‘fleecehold’ private estates and unfair costs to an end.
See King’s Speech 2024 Background Briefing p.74:
‘… enact[ing] remaining Law Commission recommendations to bolster leaseholders’ fundamental rights to extend their lease and buy their freehold (enfranchisement) and take over the freeholders building management functions (Right to Manage).’
These enfranchisement rights are essential to prevent a two-tier housing market from developing after commonhold begins. Otherwise existing flat owners risk being stuck in leasehold properties as the future around them becomes commonhold.
Dr Hamilton is among leaseholders understandably concerned to hear reports of the need for another Bill to enact these remaining recommendations, as well as rectify issues with LAFRA.
Parliamentary time is always limited and blunders happen. So there are fears that the enactment of the present Bill might trap them in the leasehold past as the new commonhold era dawns.
By Alexander Hamilton
Dr Alexander Hamilton is an economic adviser and development economist at the UK’s FCDO, where he specialises in the economies of the Middle East and North Africa. He writes on the economics of leasehold in a private capacity. The views in this article are his own, and do not necessarily reflect those of the FCDO or the UK government. His scholarly work can be found here: Alexander Hamilton – Google Scholar.
The draft Commonhold and Leasehold Reform Bill (hereafter the Bill) has rightly been described as a ‘death knell’ for leasehold.
As the excellent and forensic article by Liam Spender explains, when enacted, the Bill will deliver tangible benefits for existing leaseholders:
Specifically, the £250 cap on ground rents for the next forty years, after which they will be abolished, and the end of forfeiture, both represent real and material benefits for the millions of current leaseholders in England and Wales.
Furthermore, by diminishing and eventually eliminating one of the most profitable sources of income for third party landlords (ground rents) and mandating commonhold for future buildings, the Bill would indeed bring about the end of leasehold, alongside the Leasehold and Freehold Reform Act (2024).
However, without some important amendments the Bill will have the unintended consequence of trapping existing leaseholders in the coffin alongside freeholders.
This is because, as it currently stands, the Bill does not include some of the specific recommendations of the Law Commission – which are also absent from LAFRA – that make the conversion to commonhold a financially realistic possibility for current leaseholders.
Specifically, for most existing leaseholders, the first step to commonhold conversion, via enfranchisement, remains financially out of reach, and therefore, if this is not rectified, and the commonhold era were inaugurated, many existing leaseholders would find themselves trapped in the leasehold past.
Fortunately, enacting the remaining Law Commission recommendations that would make enfranchisement for existing leaseholders cheaper is certainly possible.
Mitigating the risk of a two-tier future housing market
To understand how the current Bill could, unintentionally, harm most existing leaseholders it is important first to briefly explain how conversion to commonhold would work for existing leaseholders.
Essentially, for leaseholders with a third-party landlord, the process of converting a block to commonhold has two parts: (1) enfranchise, which involves compensating the freeholder under existing formulas, and (2) convert the block from leasehold to commonhold.
The current Bill does, strictly speaking, make it easier for existing leaseholders to convert to commonhold. Crucially, this is primarily because it makes the second stage of the process easier, by for example, shifting from a requirement of unanimity among the leaseholders to a simple majority of 50% to agree to convert a property to commonhold.
But as it stands, the Bill does not, except through its cap on ground rents, make the first part of the process, enfranchisement, cheaper.
This means that, if enfranchisement is prohibitively expensive for a majority of existing leaseholders – and there is good reason to believe that this is now the case (see below) – their ability to convert their blocks to commonhold remains unfeasible.
So, if the Bill mandates that all new properties are commonhold, and a majority of current leaseholders find enfranchisement too expensive, then this group of leaseholders will find themselves burdened with legacy leasehold properties that are increasingly discounted against a growing stock of new commonhold properties.
In order to avoid existing leaseholder’s finding themselves stuck in this ‘bad segment’ of a two-tier housing market, it is essential that, either before, or concurrently to the enactment of this Bill, reforms are commenced to make enfranchisement cheaper and easier for most existing leaseholders.
In fact in a prior article, we analysed what specific reforms would be essential to make enfranchisement cheaper for most leaseholders – thereby ensuring that they can take advantage of a new commonhold framework.
Removing freeholders’ development value in enfranchisement – as the Law Commission recommended – is vital to reform and conversion to commonhold
In this prior article we identified two reforms, without which enfranchisement, as a first stage to commonhold conversion, would be financially impossible, or at least very difficult, for a majority of existing leaseholders to achieve.
Namely:
(1) Preventing leaseholders from having to pay development value when enfranchising, and (2) setting a floor on the deferment and capitalisation rates in statute, so that they will not fall below their current levels.
In conjunction with commencing the enfranchisement reforms in LAFRA – such as abolishing marriage value, which was disputed in the failed freeholders’ judicial review last October – these reforms would, unambiguously, ensure that enfranchisement would become cheaper and easier for virtually all leaseholders.
Losing their £5m judicial review against the leasehold reforms threatens freeholders’ long era of primacy. So, what’s next?
For readers interested in the detail of why these two reforms are crucial for most leaseholders to be able to enfranchise, this is available here: article:
Removing freeholders’ development value in enfranchisement – as the Law Commission recommended – is vital to reform and conversion to commonhold
For ease, we cite the summary case, for why these two reforms are crucial for most existing leaseholders, below:
Development value
The existence of development value, namely the possibility that new units could be built and therefore, the freeholder needs to be compensated for these hypothetical units if enfranchisement takes place, generates a prohibitive cost for most current leaseholders (see: development rights stand in the way of enfranchisement).
The proportion of leasehold properties with development value is not known. However, with some important categorical exceptions, The Town and Country Planning Order (2020), means that most current leasehold properties built between 1948 and 2018 could have one to two storeys added to them.
Given that, according to the English Housing Survey (2014-2015), the median property in use today was built in 1955 and at least a portion of properties built before 1948 and after 2018 are also likely to contain development value, it is not unreasonable to assume that most leaseholders seeking to enfranchise would face this prohibitive cost.’ (Cited from: Removing freeholders’ development value in enfranchisement – as the Law Commission recommended – is vital to reform and conversion to commonhold – Leasehold Knowledge Partnership)
Freeholders’ development rights stand in the way of leaseholder enfranchisement – and the future of commonhold
Setting the deferment and capitalisation rates:
If the deferment rate (which determine the present value of a leasehold property given the number of years left on the lease) and the capitalisation rate (which determine the present value of ground rents) both increase, they would make enfranchisement cheaper for all leaseholders.
Conversely, if these rates were lowered they would raise these costs (see: half of all leaseholders could be left worse off by unfavourable deferment and capitalisation rates. ).
As 71% of leaseholders have up to 150 years left on their lease and 77% of leaseholders also pay some ground rent, a significant fall in these rates (say to 3.5%) could make enfranchisement very costly.’ (Cited from: Removing freeholders’ development value in enfranchisement – as the Law Commission recommended – is vital to reform and conversion to commonhold – Leasehold Knowledge Partnership).
The existence of development value and the risk that the deferment and capitalisation rates are lowered threatens to wholly or at least partially offset savings that leaseholders seeking to enfranchise would see from the commencement of the relevant parts of LAFRA (see: here and here), meaning that, for the majority of leaseholders not enacting these two critical reforms, risks trapping them in a permanent state of leasehold.
Therefore, in order to ensure that the current Bill does not unintentionally trap existing leaseholders in the coffin of the leasehold system, delivering these critical reforms, which are either primary recommendations of the Law Commission (development value) or derived from a Law Commission recommendation (the Secretary of State Setting the deferment rate to ensure that the premium payable is set to make enfranchisement cheaper), would ensure that existing leaseholders benefited from the coming ‘commonhold by default’ future.
Related posts:
Freeholders’ development rights stand in the way of leaseholder enfranchisement – and the future of commonhold
Removing freeholders’ development value in enfranchisement – as the Law Commission recommended – is vital to reform and conversion to commonhold
Even if government wins Judicial Review, half of all leaseholders could be left worse off by unfavourable deferment and capitalisation rates. (And conversion to commonhold would be toast, too)
Enfranchisement, commonhold and managing agent regulation are first up for the Law Commission
Leasehold and Freehold Reform Bill: the most important part of the enfranchisement bit is missing
Death knell for leasehold
The proposed cap on ground rent at £250, combined with a 40-year sunset clause, significantly disrupts the pathway to implementing the Leasehold and Freehold Reform Act 2024.
In the High Court, the Government successfully argued that capping ground rent at 0.1% constituted a justified interference with freeholders’ property rights under A1P1, on the basis that there was a clear and overriding public interest and that the measure struck a fair balance. The proposals in the Commonhold Bill published yesterday, however, represent a qualitatively and quantitatively greater interference with those rights. For higher-value assets in particular, the cap risks being characterised as disproportionate and potentially confiscatory. This inevitably opens the door to fresh A1P1 and compensation challenges.
Consequently, if these provisions remain when the Bill becomes law, further litigation and appeals are highly likely. It is likely that the Chancellor will be reluctant to commence key provisions of the 2024 Act while the risk of compensation claims remains unresolved, meaning reform could be delayed until the legal position is finally settled through the courts.
An alternative approach—retaining the initial rent (deemed affordable at the grant of the lease) and adjusting it by the lower of inflation or the scheduled lease increases—would have addressed onerous and escalating ground rent structures while enabling the Government to proceed with the 2024 Act without provoking significant compensation exposure.
The announcement yesterday appears primarily politically driven. In my view, a group of MPs were signalling that they would consider a leadership challenge if their concerns were not addressed, and this proposal was designed to placate them. Sir Keir Starmer has positioned himself as a champion of leaseholders, but in practice these measures are likely to delay the commencement of meaningful reform by at least two to three years, based on typical judicial review and appellate timelines
I appreciate the Leasehold Knowledge Partnership for highlighting the issue of enfranchisement and emphasising the necessity of implementing the Law Commissioner’s recommendations. The article authored by Mr. O’Kelly and Dr. Hamilton was presneted in a clear and accessible manner. To ensure a comprehensive understanding of the content and issues discussed, I reviewed the article several times. Thank you.
There is an important distinction to be drawn between an original leaseholder to whom the lease was granted and a subsequent purchaser of that leasehold interest.
In the case of the original grantee, the concept of ground rent—an established feature of leasehold arrangements for approximately 300 years—is widely understood and accepted. However, the Competition and Markets Authority (CMA) has concluded that there is evidence that purchasers often do not become fully aware of the ground rent provisions until they have already incurred significant costs, such as survey fees and mortgage application expenses. Where the ground rent terms materially depart from market norms, this indicates that the developer freeholder has taken advantage of the leaseholder’s weak bargaining position. In such circumstances, it would be appropriate to cap those terms in order to remove the excess profit derived from them.
By contrast, a subsequent purchaser of a leasehold property will generally be aware of the ground rent provisions before committing funds to surveys or mortgage applications and will formulate their offer price with full knowledge of those terms. For such a purchaser to argue that the ground rent is unfair is, in effect, to contend that a previous purchaser entered into an unfavourable bargain and that they, as the assignee of the lease, should benefit from the rectification of that historic bargain. When challenged, such purchasers may rely on orthodox principles of contract law to assert their rights, while simultaneously characterising ground rent as an archaic feudal relic and claiming a lack of understanding of the contractual terms they accepted. Interference with a contract that has subsequently been assigned, where the buyer knew the terms from the outset, would appear particularly difficult to justify under Article 1 of Protocol 1 (A1P1), where there is no clear public interest objective beyond the transfer of wealth from one private party to another.
Accordingly, it would be appropriate for any capping regime to distinguish between these two categories of leaseholder. Where the original grantee remains the leaseholder, the ground rent could be capped at approximately 0.1% of the premium paid, with increases limited to the lower of inflation or the contractual escalation provisions. For subsequent purchasers, the existing ground rent should remain in place, with future increases similarly capped at the lower of inflation or the contractual escalation provisions.
This approach would not require the involvement of a valuer and would be straightforward to implement, as the premium paid is disclosed in the lease and Land Registry records clearly indicate whether the lease has been assigned.
This proposal would immediately address the issue of ground rents becoming unaffordable, as the rent would never increase in real terms from the point at which it was initially agreed. The introduction of a sunset clause—although I personally disagree with it—does assist the Government in achieving its policy objective of ultimately ending ground rents. I also consider that those who would otherwise challenge the Government’s policy of capping ground rents at £250 are highly likely to accept this alternative approach.
Thanks for this article. Why is the Government inviting another legal challenge and yet more delays to much needed reforms, rather than implementing the oven-ready 2024 Act that survived the freeholders’ legal challenge last year and had cross-party support? Will those of us with short leases now have to wait until 2028 at the earliest and then persuade half the flats in the building to convert to commonhold?
If the legislation were to take, for example, 18 months to pass, the legal challenges would likely commence at that point. If the matter were then appealed through the domestic courts and ultimately to Strasbourg, the process could extend for a further two years, suggesting a potential resolution timeframe of around mid-2029.
It appears that this proposal may have been intended, in part, to constrain Members of Parliament who might otherwise have supported a leadership challenge. The Bill was not ready in December, and if this shift represents a response to criticism from within the Parliamentary Labour Party, it implies that the proposals under consideration prior to December 2025 were less aggressive and were designed to mitigate the risk of a successful challenge under Article 1 of Protocol 1 (A1P1). Sir Keir Starmer appears to have changed course: politically, this allows him to be seen as supporting leaseholders, while the task of articulating the legal and technical constraints will fall to the European Court of Human Rights.
Those advocating for peppercorn ground rents or a £250 cap may therefore find that the legal limitations are clarified by the courts rather than by Ministers. In such circumstances, Sir Keir Starmer’s political standing is unlikely to suffer significant damage.
Have you had regard to the criminal liability for Fire safety that one of the common hold owners will have to take on as a result of upcoming implementation of Building Safety Act? Common holders will need to select from their fellow owners an “Accountable Person” ( a role which cannot be delegated) to accept criminal responsibility for injury or death attack from a defect in a building which allows a fire to take hold or spread. Good luck with finding someone to do this. The outcome if you can’t is that the building will NOT be capable of being occupied.
I am a Leaseholder and a Director of the limited company set up by the Freeholder before the 14 flats were sold. (Flats converted from Offices).
Because there are the required 2 Directors, I can run our building day to day. We still pay the Freeholder’s Management Company because separating from them
is too complicated.
I am the nominated person taking responsibility for Fire Safety and consequently I am protected by an Insurance Policy. The building is tested for Fire Safety at the beginning of every month. All those living here are given instructions in case of Fire and the communal areas are well signed as per the Fire Inspectors recommendations.
Being diligent and following the rules keeps us safe.
The only thing neither I nor the Management Co. can’t do is to choose and buy building Insurance. That task is given by law, to the Freeholder. This must be changed.
Our Freeholder bundles all his properties together for insurance purposes. So buildings with cladding and no cladding are lumped together. The amount the Freeholder paid for the Insurance is divided by the number of Properties he owns. We then pay that share. The Freeholder pays nothing!
He may get sweetners to use one firm instead of another. You are entitled to ask him if an incentive is involved, he’ll never tell you if he has been give a sweetner.
By running our building I am able to save a significant amount of money each year and the Service Charge does not increase.
Though thankful the GR will not increase, my and 18 others GR is already £250. (0.216%,) If the 40 year countdown to peppercorn (I do find these feudal terms tiresome, including ‘landlord’) our freeholder investment company will be paid over £400,000 for as everyone says – nothing. They only paid £52,250 for the title anyway, doubling their money to date.
In 42 years time I shall be in theory, 109, so no benefit to me, but will my inheritors have to pay yet more to secure Common hold and ultimate freedom from parasitical investors?
A few thoughts. (I agree with much of what you say).
(1) I genuinely do not see what is so good about commonhold, and indeed I would not wish to touch commonhold until at least 10 or 20 years after it has become reasonably widespread. Being a guinea pig is never a good idea.
(2) I believe that the problems with leasehold are all things which can be dealt with whilst retaining leasehold. If every lease was 999 years (or 999,999 years, whatever), with zero ground rent and a share of the freehold there would be little to complain about. We can avoid part of the issues of a future two tier market by retaining leasehold and not pushing commonhold!
(3) Saying that properties still need to be properly managed, and there must be a cheap and easy way of ensuring that buildings are properly managed, whether the management is being done by leaseholders, commonholders or the freeholder. By that I mean a cheap and easy way of putting the management into the hands of a properly regulated management company and ensuring difficult leaseholders / commonholders do not block essential works.
(4) The idea that 50% of the leaseholders in a building could be forced by the other 50% to convert from a tried and tested leasehold system to an experimental and potentially unmortgageable (until the mortgage industry becomes more comfortable) commonhold system is nuts. How can you force a lender to accept a change in tenure of the asset they have lent on?
(5) Development value MUST be paid. It would be insane if a freehold was subject to 10 no. 999 year leases at peppercorn ground rents, but had a flat roof worth £1m. A £1m asset gets sold for £1 because development value is to be ignored. Utterly insane and in complete contradiction to the aims of government to facilitate development / housebuilding.
(5) Development value must only be paid when the market would pay it – in other words only when planning permission in place, OR when the market says “it is bloomin’ obvious that there is development value – just look at the big flat roof / massive communal gardens which the freeholder retained the right to build on at any time / etc / etc”. But it must be paid.
(6) Perhaps the answer is that leaseholders are always given the choice – pay the development value, or allow the current freeholder to retain development value by reference to the granting of a development lease (or development commonhold share).
(7) IMHO the simple thing to do would be to keep the deferment rate at 5% and set cap. rates at an appropriate level to ensure the enfranchisement price is close to a current market value. This would put cap rates at circa 7.5% to 15% IMHO, with perhaps 8.5% to 10% being where most should lie. Perhaps 9% would be a fairly reasonable compromise that could be applied to every freehold.
(8) I have not done the maths, but if government wanted to equalize the deferment and capitalisation rates it should probably be done at around 6% to 7.5%.
(9) It is utterly disgraceful and disgusting that the labour government have not prioritised bringing the 2024 Act into full force. It is disgraceful that leaseholders (especially sub-8 years unexpired) are in a lose lose situation where waiting it a massive risk, but going ahead now is potentially a waste of tens of thousands of pounds.
Lease enfranchisement is an extremely problematic issue for shared owners who were, it seems, most likely of all leaseholders to be sold short 99-year leases. And who by definition – given the need to meet ‘affordability’ criteria – are least likely to be able to afford the costs of lease extension. To compound their problems, they still currently have no statutory right to lease extension, leaving them exposed to pitfalls associated with the informal route.
Most were not informed about the implications of their short leases by either the housing associations promoting these homes as ‘affordable housing’, nor their solicitors. Many feel mis-sold as a consequence.
This is why in our 2023 report, ‘Shared ownership: the consumer perspective’, we recommended that: • Government, Homes England, the Greater London Authority and housing associations should consider options to fund lease extension to at least 250-years at an affordable flat fee for all shared owners whose lease term was originally 125-years or less.’
I would like to know the position of a house converted to 2 flats .
I am a leaseholder with a 999 years lease.
How will the new law affect me and where do I stand?
Also the issue of insurance which falls on the freeholder.
Due to data protection I am unable to communicate.
Could leaseholders name be added?
Excellent article, as always
Enacting legislation to deal with the issues raised in this article to ensure enfranchisement is achievable must be the priority of the Government in this area: it is the most important aspect of the reforms. However, I was wondering if it may be feasible or advisable for the Government to enact first the much less difficult and not controversial legislation to convert existing share of freehold buildings into Commonhold. It will benefit immediately leaseholders in enfranchised buildings, where the leasehold system causes problems as well, and will give the opportunity to the government of having a gradual introduction of the new Commonhold regime in a minority of buildings switching before the rest of England & Wales from share of freehold to Commonhold. Is it viable running such sort of “pilot” conversion from existing share of freehold buildings to commonhold buildings and could it be beneficial to all leaseholders?
Some council leaseholders cannot enfranchise, cannot buy freehold because in high rise blocks the majority are council tenants .
And councils treat leaseholders no better than the private sector, taking money for what they do not provide or triple prices for service and works. Please do not forget council leaseholders to integrate into the leasehold reforms!