Residential leasehold portfolios – enfranchisement and reform


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The problems, the solutions, benefits of a healthy portfolio and the leasehold reforms of all residential leasehold portfolios.

The problem

A neglected or unknown residential leasehold portfolio is a problem that grows over time. Diminishing lease terms affect occupational tenants as well as the value of the property as an asset or as security for borrowing. Although there is an increasing awareness of enfranchisement and lease extension rights, many housing providers are not monitoring or addressing their own leasehold portfolios.

It is good practice for providers to have an informative database of all property held as leaseholder, be it an estate, block or single flat and should form part of an assets register. The most important elements of a lease to be aware of are the term, demise and rent, which directly influence the value of the property and the cost to extend the lease. This information is readily available at the Land Registry with only reference to the registered title, so the initial preparation of such a database can be less daunting than first thought.

The shorter the lease, the less the property is worth. Together with an increasing ground rent, a short lease can become expensive to extend. However the problems are not a simple as that; a short lease or diminishing term has more wide ranging effects:

  • Any extension of an under-tenants lease is limited to the term the housing provider holds. This causes problems for tenants on obtaining a mortgage, refinancing, sale and value, of which can cause reputational damage.
  • Where the lease drops below 80 years an additional value is payable on a statutory extension, known as marriage value. This can in some cases double the premium payable.
  • A provider's own ability to charge or refinance the property will be limited.

Housing providers are therefore encouraged to have a good handle of what leasehold properties they own, which properties are owned on short leases and what rights are available to address the issues.

The solutions

Housing providers as leaseholder have the same rights as any residential individual leaseholder, subject to qualification criteria, being:

  • Statutory lease extension of a flat for an additional 90 years at a peppercorn rent, whether held under an individual lease, block or estate headlease (where there is no long lease under tenant).
  • Collective enfranchisement rights for the freehold of a building containing flats, exercised together with other leaseholders in the building.
  • Statutory enfranchisement claim to the freehold of a house or lease extension.
  • Claims for the freehold or lease extension where the freeholder is absent.

It is essential to be aware of these rights, how they apply to a portfolio and to exercise them when needed. Where multiple individual leasehold properties are owned with the same landlord, group claims can be made in order to save time and costs.

Benefits of a healthy leasehold portfolio

In exercising these rights not only is an extended lease term or freehold obtained, a new lending opportunity arises on the newly invigorated asset. Therefore a leasehold portfolio that on the face of it looks like are large problem, can become a new source of financing.

The crucial element is to identify the leasehold properties most at risk, in terms of extending the term or buying the freehold. Where leases approaching 80 years are identified, notices can be served freezing the valuation date so additional marriage value not payable to the landlord as part of the premium.

Where under tenants seek to re-mortgage, extend their own underlease or need to vary terms, with a longer lease or freehold interest housing providers can be more flexible in what they can offer to under tenants. Where the freehold has been obtained there may also present the opportunity of extending the property into roof, basement or garden space or perhaps adding a residential unit to the property.

Leasehold reform

The Law Commission has recently concluded a consultation on dramatic reforms to enfranchisement rights, the objective of which is to make the statutory rights easier and cheaper to exercise for leaseholders. Housing providers will be in position to take advantage of these reforms as leaseholders by making less costly claims for longer leases and freeholds.

In addition to enfranchisement the law commission are also consulting on ground rent, right to manage and common hold with the aim of overhauling the entire leasehold system of ownership.

The intentions of the reforms should create a cheaper system of re-invigorating leasehold portfolios, however the timing of such reforms coming into law is far from certain and short leases should still be addressed when at risk and where possible before leases drop below 80 years remaining.

Whilst there is a welcome proposal for leaseholders, housing providers in their landlord seat may equally have cause for concern. A cheaper system for leaseholders means the landlords will lose out in the recoverable premiums due from leaseholders. In addition there are suggestions of limited costs recovery from leaseholders. A review of the general portfolio of stock can reveal where there may be risks of losing value. The key point to loss of value is in the valuation methodology, currently based on the loss to the landlord or ground rent, the reversion and marriage value. Suggestions of a ground rent multiplier or percentage of capital value for lease extension and freehold claims would substantially devalue assets across the country.

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