Leasehold Enfranchisement: Blessing or curse?

• extend a residential lease, and
• acquire the freehold

The purpose of those rights is to enable tenants to continue occupation of their residential property at a fair price and on fair terms. It also allows leaseholders to maintain capital value and the ability to mortgage.

Has enfranchisement been a blessing or a curse?

The Leasehold Reform Act 1967 (LRA 1967) is nearing its 50^th birthday and the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993) is old enough to have left university and qualified as a lawyer. Like all grown-up children, they can be both a blessing and a curse.

From a social point of view, the blessing has been that enfranchisement has undoubtedly extended the ‘property owning democracy’ dreamt of by successive governments. Many tens of thousands of house owners have acquired their freeholds, lessees of flats have been able to acquire secure long lease terms and groups of lessees have been able to acquire the freeholds of blocks of flats.

The curse is that in many cases, the rules have been exploited by commercial and semi-commercial developers seeking to acquire properties—often at a perceived discount to the market price. Moreover, newly enfranchised freeholders of blocks of flats may not always make good landlords.

What have been the key challenges around enfranchisement since its introduction?

The main challenges are that the law is complex, frequently inaccessible, and the valuation principles opaque. When combined with high property values, these considerations mean that leasehold enfranchisement has generated significantly more work for the higher courts and tribunals than almost any other area of property litigation.

What have been the defining cases?

There is no room for anything other than the seven House of Lords and Supreme Court cases:

• Cadogan v Sportelli [2007] EWCA Civ 1042, [2008] 2 All ER 220—hope value
• Aggio v Howard de Walden Estates Ltd [2008] UKHL 44, [2008] 4 All ER 382—lease extensions for headleases
• Arbib v Earl Cadogan [2005] 3 EGLR 139—deferment rate
• Boss Holdings Ltd v Grosvenor West End Properties [2008] UKHL 5, [2008] 2 All ER 759—meaning of ‘house’
• Malekshad v Howard de Walden Estates Ltd [2002] UKHL 49, [2003] 1 All ER 193—meaning of ‘house’
• Shalson v Keepers and Governors of the Free Grammar School of John Lyon [2003] UKHL 32, [2003] 3 All ER 975—improvements.

How will the settlement in the Westbrook case affect enfranchisement?

Westbrook involved what was once the largest block of flats in the world. Mann J held that the lessees of the flats could acquire the freehold under LRA 1967 and LRHUDA 1993. Mann J considered a number of important points, including:

• company ‘schemes’ in enfranchisement
• the meaning of ‘residential purposes’ in LRHUDA 1993
• the various tests for the validity of LRHUDA 1993, s 13 (s 13 notice); and
• transactions at an undervalue under the Insolvency Act 1986, s 423

The judge rejected all the freeholder’s objections to enfranchisement. Although an appeal was expected, the matter settled shortly afterwards.

There was a lot in the 455-paragraph judgment of Mann J in Westbrook—perhaps unsurprising, given that it involved the largest collective enfranchisement ever made. The subsequent settlement left some of Mann J’s conclusions unresolved by the Court of Appeal.

In my view, some of the most intractable issues concern the simple question whether an initial LRHUDA 1993, s 13notice claim is valid. In Cadogan Estates Ltd v Morris [1998] EWCA Civ 1671, [1999] 1 EGLR 59, the Court of Appeal held that initial notices which specified an ‘unrealistic’ purchase price was invalid, but effectively ducked the question as to what test should be applied. Mann J grappled with the issue, but rejected the various objective tests offered to him by counsel. He settled on a subjective test as to whether a proposal was realistic or not. That is not very helpful for most practitioners who need to advise fairly quickly whether a notice is valid or not, and it had been hoped the Court of Appeal might have reconsidered the test.

What are your predictions for the future of enfranchisement?

The latest reforms, namely the Leasehold Reform (Amendment) Act 2014, only tweaked the legislation. There is no obvious sign of further major legislative developments.

This area of work is market driven. As long as there are residential leaseholds with high values, there will always be a future for enfranchisement.

Interviewed by Susan Ghaiwal.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.