Residential lease extensions and enfranchisement

The Government have recently updated and made changes to the Capital Funding Guide in relation to proposals regarding enfranchisement, lease extensions and shared ownership. In this article, we will give an overview of the new changes and discuss what they mean.

General statutory rights

Flats:  Under the Leasehold Reform Housing and Urban Development Act 1993, qualifying tenants of residential leases of flats either:

  • have the right to either collectively buy the freehold of the block of flats (known as collective enfranchisement) if the flats are in premises that satisfy the certain criteria; or
  • have an individual right to the grant of a new lease for which they will need to pay a premium. The new lease will be for a term of 90 years plus the remainder of the term of the existing lease.  A peppercorn (nominal) rent will be payable but otherwise the new lease will generally be on the same terms as the tenant’s existing lease.

Houses:  Under the Leasehold Reform Act 1967, qualifying tenants of houses either have the right to:

  • acquire by enfranchisement the freehold. The qualifying tenant will need to pay a premium (the purchase price) to the landlord which will be the market value of the freehold; or
  • obtain a new lease of the house. The new lease will be for a term of 50 years and will commence on the date the tenant’s existing lease expires.  The new lease will also contain provision for the payment of ground rent which will be subject to review after 25 years.

The shared ownership quandary

Shared ownership tenants are not classified as holding a long lease unless they have “staircased up” to 100% ownership.  This is problematic as the shared ownership lease model first appeared in the late 1970s/early 1980s and originally saw leases granted for a term of 99 years.  This means that the remaining term of many of those original leases is now significantly less with circa 40 years remaining.

A shared ownership tenant looking to sell on their interest is unlikely to find a buyer with such a short term remaining.  They will also encounter difficulties re-mortgaging their property as lenders have a minimum lease term- generally anything under 80 years is considered a “short” lease.

Although some registered providers have in place their own policies for lease extensions where there is less than 100% tenant ownership, not all do and the terms of the lease extension are largely at the landlord’s discretion.

The Capital Funding Guide (CFG) has confirmed that as a lease extension is not subject to a fundamental clause, there is no requirement for a registered provider to seek consent from Homes England to extend the term of a shared ownership lease (section 5.2).  The CFG “strongly recommends” that registered providers grant extensions “wherever possible” and to “offer as a long a term as possible” on “fair terms” (section 7.6.3).

Considerations for extending shared ownership leases

The following issues should be considered when discussing a lease extension with a shared ownership tenant (CFG section 7.6.6):

  • Rent: A lease extension is not deemed to be a variation of the lease, therefore the original fundamental clause in the lease regarding the rent payable will remain the same.
  • Value: A lease extension may initially increase the value of the lease and have a knock-on effect on the price of any future shares in the property that the shared owner may wish to purchase.
  • Staircasing: If the lease is extended, the value of the tenant’s share and the registered provider’s share will both have increased.  Therefore consideration needs to be given as to how any increased shared purchase may affect the revised rent calculation when the rent review clause is implemented by the parties.
  • Legal costs: In most cases the shared ownership tenant will instigate the lease extension and registered providers may therefore expect the tenant to pay the registered provider’s legal costs.
  • Policy: While acknowledging this is not a regulatory requirement, the Capital Funding Guide recommends that a registered provider produces and publishes their own policy on shared ownership lease extensions to provide clarity for all their shared ownership tenants and avoid any future misunderstandings or tenant complaints.

Proposed shared ownership lease extension reform

It is perhaps unsurprising that the Ministry of Housing, Communities and Local Government (MHCLG) has recently announced a package of reforms for shared ownership properties aimed at giving tenants greater long-term security.  These reforms include extending the statutory right to a lease extension to shared ownership tenants.  Although still “exploring options” in situations where the landlord of the shared ownership tenant does not own the freehold, MHCLG have indicated that where they do, the Government would be looking to introduce a statutory right for a shared ownership tenant to extend their lease by 990 years.

For more information, please contact Aruna Sarwar or Jonathan Corris.

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