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27 March 2018

Leasehold reform’s Golden Jubilee

This article was first published by Estates Gazette.

On the 50th anniversary of the coming into force of the Leasehold Reform Act 1967, John Stephenson reflects on a landmark piece of legislation.

The Leasehold Reform Act 1967 can justifiably be regarded as the landmark piece of legislation for houses during the more than century-long process of addressing what are seen as the ills of the leasehold system.

On the 50th anniversary of the coming into force of the Act, it is a moment to look back to its passing and the effect that it and its sister legislation relating to flats (the Leasehold Reform, Housing and Urban Development Act 1993) have had and continue to have on the principles of leasehold tenure.

The history of the Act It was as far back as 1884 that the splendidly named Royal Commission for the Housing of the Working Classes concluded that ‘legislation favourable to the leaseholder would conduce greatly to the improvement of the dwellings of the people of this country’.

In 1886, a parliamentary select committee was appointed to inquire into the expediency of giving the leaseholders facilities for the purchase of the fee simple (freehold) of their property. Lawyers will note that these things were being discussed long before the Law of Property Act 1925; leasehold reform was an old idea by the time it finally reached the statute book.

Given the dominance of landowners in parliament in the late 19th century and first half of the 20th, it is perhaps unsurprising that these early efforts gained little traction.

It was the combination of a Labour administration under Harold Wilson, and the plight of Welsh miners – whose leases of their cottages, granted in the 19th century when the freeholds were usually owned by the mine owners before post-war nationalisation, but now mainly owned by remote corporate investors, were rapidly nearing their end – that finally moved parliament to act. First, parliament introduced the 1966 White Paper on Leasehold Reform in England and Wales, and then the bill which became the 1967 Act.

The individual politician most associated with leasehold reform is, of course, George Thomas, the Labour MP for Cardiff West, born in Port Talbot, and steeped in the heavy industry of 20th century South Wales. In the 1950s he even had a stall in Cardiff market, where he would seek to persuade anyone who would listen of the iniquities of the leasehold system.

While the precise extent of his role is a matter of debate, he was certainly the leading flag-carrier for leasehold reform – as those affected by falling lease terms faced having to negotiate new market rents under (then) part 1 of the Landlord and Tenant Act 1954, or longer terms with no rights of control of ground rent or premiums, if they were not to lose their homes altogether.

The right to acquire the freehold is often, in both the 1967 and 1993 Acts and in casual parlance, referred to as ‘enfranchisement’, a term which harks back to the days when the right to vote was conditional on being a freehold property owner – therefore the purchase of a freehold actually enfranchised the buyer.

As we celebrate the centenary of the first women being given the right to vote in the UK, it is worth noting that, even in 1918, a woman could vote only if she was over 30 and owned property.

The aim of the Act

The 1967 Act was very much aimed at protecting homeowners of low-value houses, though the value limits – set by reference to rateable values – did catch even some smaller houses, such as mews properties, in what is now known as prime central London.

While it is primarily known for the right to acquire the freehold ‘on fair terms’, it also conferred a right for the leaseholder to acquire a 50-year lease extension free of charge, paying (during the extended period) a ground rent based on the site value of the property. The principle behind the 1967 Act was, in simple terms, that while the ground on which the house stood should be treated as the landowner’s, the house itself should be regarded as belonging to the leaseholder.

It is an interesting commentary on our attitude to home ownership over the past 50 years that, while the right to the freehold has been extended by successive Acts to just about everyone and everything owning a long lease of a house, individual or corporation, UK or offshore, occupier or investor, the criteria for the extended lease have remained almost unchanged over that period.

It must not be forgotten in the general admiration for the 1967 Act (despite its rather variable drafting) and indeed those Acts that have further developed the principles of the right to acquire the freehold (and, in the case of the 1993 Act, for flats an extended lease), that this is confiscatory legislation.

A landlord is forced to sell or significantly diminish its interest at a time not of its choosing and at a price which (if determined by a tribunal) it must accept. The Grosvenor Estate famously took this to the European Court of Human Rights (James v United Kingdom [1986] ECHR 8793/79) but the Act was upheld by the court as a legitimate means of promoting the public interest.

The Act today

So what would George Thomas think of the state of the 1967 Act now? He would applaud the extension by the 1993 Act of the equivalent rights to flat owners, I venture, but as a true socialist would not look kindly on the extension of the rights to companies and investors, and to properties of any value.

For him, the sole concern was individual homeowners of limited means; but he might, I suggest, accept that as an inevitable part of the continuum of erosion of leasehold tenure in England and Wales, which to him was fundamentally iniquitous, and which still baffles overseas buyers.

Above all, he would be puzzled that, 50 years after the Act came into force, lawyers would still be arguing in court about what can reasonably be called a house.

Evolution of the Leasehold Reform Act 1967 – timeline of principal developments

Housing Act 1974

Alternative (higher) rateable value limits based on the 1973 revaluation and a new valuation basis (section 9(1A)) including marriage value for properties newly brought into the ambit of the Act.

Housing Act 1980

Five-year residence requirement reduced to three years, leasehold valuation tribunals given jurisdiction for the first time.

Leasehold Reform, Housing and Urban Development Act 1993

Aside from bringing flats into the overall ambit for leasehold reform with lease extensions and collective freehold claims, the 1967 Act’s scope was extended by removing all value limits for a freehold claim (which involved a new valuation basis 9(1C) for the highest-value houses, taking away the assumption of security of tenure under the Local Government and Housing Act 1989 at the end of the term, and included payment for ‘additional loss’, that is any adverse effect on the landlord’s interest in other properties as a result of the freehold claim) and an alternative low rent test by reference to the initial and not simply the current rent. A fresh and time-limited right to establish estate management schemes was also introduced.

Housing Act 1996

Low rent test removed for most freehold claims where the existing lease was granted for more than 35 years.

Commonhold and Leasehold Reform Act 2002

Share of marriage value fixed at 50/50 for landlord and tenant, and abolished altogether in cases where the lease has more than 80 years to run at the date of claim; freehold rights extended to the personal representatives of a deceased leaseholder who qualified at the date of death, and also to those holding a lease already extended under the 1967 Act (though the valuation will substantially disregard the extension); almost complete abolition of the residence test (the prime exception being where the lease is also a business tenancy), thus giving corporate tenants 1967 Act freehold rights for the first time.

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