Leasehold Reform Judicial Review Failure Could Leave New Freeholders Out of Pocket, Expert Warns

The problem arises when a freehold buy-out by leaseholders does not have the participation of all the leaseholders (the most common scenario). Provided the majority agree, the freehold purchase goes ahead but the participants are required by law to pick up the costs of those not taking part at a prescribed rate. Following the reforms, any hope of recouping their outlay through marriage value calculations during lease extensions, are dashed by the reforms. 

“For decades, people did exactly what the law told them to do. They did the right thing in the right way. Now they’re being punished, while others, their neighbours, get a free ride at their expense”. Mr. Somekh said.

The judicial review, brought by opponents of the Leasehold and Freehold Reform Bill, challenged the government’s plan to abolish “marriage value- the premium paid to landlords by leaseholders when extending a lease which has less than 80 years remaining.

Freeholders argued that scrapping marriage value amounts to a “transfer of wealth” that breaches their human rights.

However, the High Court dismissed the challenge earlier this month, clearing the way for the reforms to proceed unchanged. The ruling has been celebrated by leaseholder campaign groups, who say it will finally make it affordable for flat owners with short leases to extend their leases or buy their freeholds outright.

But for a growing number of new freeholders, estimated at over a million people and their families, who banded together to collectively purchase their building’s freehold - the decision has had the opposite effect.

“These individuals paid substantial sums to enfranchise under the existing rules,” explained Mr. Somekh. “Now, if their non-participating neighbours extend their leases under the new regime, the new freeholders will see no return. They’ve effectively paid for other leaseholders without any compensation."

In a typical scenario, one of The Freehold Collective’s clients has recently completed a collective enfranchisement of a 46 flat block in North London. However, 12 of the leaseholders did not participate in the purchase which meant their share of the costs, fees and premium had to be picked up by others. To add to the shortfall, there will be no hope of recovering their unintended investment from lease extensions.

Another leaseholder that decided not to participate, explained to The Freehold Collective, that they purchased a low lease because it was the best and only affordable way for them to live in their chosen area. Whilst they will take an unexpected windfall if the law changes, they fear that the two tier system will hugely impact their relationship with their neighbours and fear for their grandchildren will not be able to afford to purchase properties as they did.

Analysts say the issue will create an uneven playing field, leaving recent enfranchisees bearing massive financial losses while their neighbours benefit from future reforms. Some legal experts have also warned of potential disputes and compensation claims as the new legislation takes effect. Many economists, predict that the impact of wealth transfer, will further erode confidence in the UK housing market, impact investment in pension funds and desperately needed new housing and risk further exacerbating the housing crisis.  

Mr. Somekh urged ministers to consider transitional protections for those caught in the gap between the old and new systems.

“The principle of fairness must apply to everyone,” he said. “No Government should  encourage people to take control of their buildings, then change the rules, and strip them of the value they’ve just paid for without any compensation. If it’s in the public good, then it has to be good for the public.”

Mike Somekh, CEO of the Freehold Collective