[2025] EWHC 2751 (Admin)

The cumulative effect of the measures

The claimants submit that the compatibility with A1P1 of the three measures under challenge must be judged in the context of all the statutory amendments since the LRA 1967 which have widened the scope of enfranchisement and its impacts on the property interests of landlords. We accept that in adjudicating on the claimants’ A1P1 challenge, it is appropriate to step back and look at the cumulative effect of the various reforms to enfranchisement so far as the reversionary interests of landlords are concerned (see Hutten-Czapska [168] and [224]).

We have summarised the changes above. In his skeleton Mr Maurici describes the effect of the pre-LFRA 2024 legislation as involving an expansion from the “limited deprivation” considered by the ECtHR in James to a broad right to deprive landlords of their reversionary interests in most types of leasehold, regardless of whether the tenant lives in the property. That expansion, Mr Maurici submitted, has taken place on the basis that landlords received the open market value of their interests, that is reversion value, term value without a cap and, where it exists, a 50% share of marriage value. But Parliament has now legislated to reduce significantly the compensation payable for that expropriation.

Pausing there, and leaving to one side the original, more restricted valuation in the LRA 1967 which was considered in James, we note that there has been no complaint about the pre-existing level of compensation as representing open market value. Indeed, as we have seen, some investors have bought reversionary interests on a large scale in the expectation of receiving not only steady income streams from ground rents but also marriage value as well as term value and reversion value when claims for enfranchisement are made. It might be said that such investors have taken advantage of the opportunities presented by the enfranchisement regime.

Mr Maurici submits that the issue of whether the measures under challenge are compatible with A1P1 must also be looked at in conjunction with other provisions of the LFRA 2024 which widen the circumstances in which enfranchisement may take place whilst also curtailing landlords’ rights and imposing upon them additional costs and losses. He referred to three such measures, whilst accepting that they are not themselves the subject of any incompatibility challenge.

First, the LFRA 2024 removed the two-year ownership requirement for the right to enfranchise, which the CLRA 2002 had introduced when removing the former residence requirement (see e.g. transcript for day 2 at pp. 319-321). In its Consultation Paper the Law Commission recorded at [2.25] that the two-year ownership requirement was to prevent the use of enfranchisement by investors for short term speculative gains (see also Lord Carnwath JSC in Hosebay Limited v Day [2012] UKSC 41; [2012] 1 WLR 2884 at [4]-[5]). Removing that ownership requirement will increase the number of claims to enfranchise.

Second, s.29 of the LFRA 2024 amends the exclusion of buildings in mixed use from collective enfranchisement by increasing the percentage of internal floor area of a building which may be occupied for non-residential purposes from 25% to 50%. It is said that this will both increase the number of collective enfranchisement claims and remove landlords’ management control and frustrate or discourage development. The IA does not monetise this impact. Instead it simply acknowledges that “there could be some impact on investment in mixed-use development and new supply” (para.144), but adds that there will not be a “significant detrimental effect”. C&G submits that that judgment is contradicted by evidence that “commercial property values on flagship shopping streets held by estates are 100% above values on proximate streets held in fragmented ownership” (Mr Roberts’ report paras.125-126 and Mr Hunt’s report paras. 3.16-3.18). Mr Roberts expects landlords to take defensive steps to limit the impact, but that would inevitably come at a cost. Mr Maurici submits that the failure to estimate those costs weakens the IA.

Third, s.32 of the LFRA 2024 makes it mandatory for a landlord to accept leasebacks for 999 years of units held by tenants who do not participate in a collective enfranchisement of a block of flats. It is said that, like the new 50% non-residential limit, this provision will remove management control from landlords and frustrate development opportunities for long-term investors (Mr Roberts’ report para. 16). While the IA acknowledges a concern that mandatory leasebacks could reduce investment and represent a further loss of value, it asserts that a leaseback “is a valuable interest” ([149]). But the claimants complain that the IA does not assess the value of that leaseback as against the value lost to the landlord. The claimants also say that the 50% limit and/or mandatory leasebacks would not need to have a significant impact on landlords for their additional costs to more than offset the £90.9m of net benefits that the IA estimates will be generated by the LFRA 2024 over ten years.

The claimants submit that viewed overall the package of reforms will cause landlords to bear a burden which is too heavy for the balance to be fair. As Mr Maurici put it, those measures are “the heavy straw that broke the camel’s back”.

We have already given our reasons for concluding that the three measures under challenge do strike a fair balance for the purposes of A1P1. As Mr Moules submitted, the IA did consider the reforms introduced by the LFRA 2024 cumulatively and explained why it was judged that the effect of certain reforms could not be monetised. The additional non-monetised reforms referred to by the claimants were addressed by the IA. In this regard it is important to note the distinct questions which the three challenged reforms tackled, and the means adopted for tackling them:

Having concluded that each of the three reforms represented a fair and proportionate means of addressing different aspects of the unfairness inherent in the leasehold model of property ownership, and that none had the effect that the particular element of the total amount payable to a landlord on enfranchisement ceased to be reasonably related to market value, we are satisfied that the claimants are no better placed by asking the court to consider the cumulative effects of the three measures in A1P1 terms than in considering them in isolation.

What of the additional matters relied upon?

In relation to the removal of the two-year ownership requirement, at [116] the IA stated that this provision had not achieved its intended purpose. The requirement could be avoided, yet it remained an obstacle for an original residential tenant wishing to enfranchise. No doubt the authors had in mind the considered views of the Law Commission. In its Consultation Paper the Commission set out criticisms at [7.118] et seq. That consultation exercise only served to reinforce the Law Commission’s provisional view that the 2-year ownership requirement should be repealed. Their detailed discussion included the following at [122]:

“Around 450 consultees – a notably high number compared to the average of around 300 who responded to each question in this chapter – answered this question, almost all of whom agreed with our position of removing the two-year ownership requirement. Consultees supported our suggestions that the requirement is easily avoided, that it causes delays and complications for leaseholders.”

The Law Commission added at para. 6.128:

“For sophisticated commercial investors, the ownership requirement is easy to avoid; for ordinary leaseholders, it can comprise a serious obstacle to exercising enfranchisement rights, often by being responsible for the premium increasing over the two-year period. These points have been confirmed to us both by consultees and by our advisory groups.”

We do not accept that a “fine-tuning” of the detailed elements of the enfranchisement process of this kind, to address a feature of the existing regime which had been found to do more harm than good, materially increases the burden placed by enfranchisement on landlords, and, to the extent that it does so, the Law Commission identified a sufficient justification for it which it was manifestly within Parliament’s margin of appreciation to adopt.

In relation to the 50% non-residential ceiling the reasoning in [144] – [146] of the IA was rather more extensive than the claimants’ submissions suggested:

“143.

There are also some costs to freeholders that we haven’t been able to monetise. Freeholders of mixed-use buildings with over 25% up to 50% non-residential floorspace usage will potentially be subject to collective enfranchisement and right to manage claims where under existing legislation they could not have been. Freeholders argue the potential for claims will make investment more expensive and discourage redevelopment of mixed-use spaces such as high streets, representing an associated depreciation in the value of existing assets in such spaces. Freeholders also argue a successful claim may result in several costs. Freeholders argue that a successful collective enfranchisement claim of such a building will negatively impact on the value of other adjacent properties in areas such as high streets and mixed-use developments, where single ownership of multiple adjacent mixed-use properties is common. They argue the inability to manage a contiguous portfolio will negatively impact the value of any remaining properties. They argue this fragmented ownership will also discourage future redevelopment and investment and make it more expensive with associated valuation implications.

144.

While it is accepted there could be some impact on investment in mixed-use development and new supply, and the data in this space is limited, the Government is not convinced that an increase of the non-residential limit to 50% will lead to a significant detrimental effect on investment in mixed-use buildings and developments, including for regeneration. Decisions on the form of new or regenerative development will be affected by many factors of which the non-residential limit is one. Additionally, by an amendment made by the Commonhold and Leasehold Reform Act 2002, the non-residential limit for collective acquisition has been raised before, from 10% to 25%, and similar concerns were raised at that time, but investment in mixed-use buildings up to 25% non-residential floorspace has continued. Housing supply had continued to increase to the highest level in 2019-20, the highest in over 30 years, despite the previous change and most of these have been built by private providers for market sale.

145.

Moreover, successful leaseholder-led management of mixed-use buildings already takes place in mixed-use buildings with up to 25% non-residential floorspace, and building maintenance and management may also be of higher standard if the responsibility lies with leaseholders who are likely to be more invested in it, given that they live there and own properties in the building. Appropriate safeguards for landlords to act against poor management of the building are also in place where the leaseholders take up their right to manage and freeholders will continue to enjoy protection where a building can reasonably be described as substantively non-residential.

146.

The government’s view is that increasing the non-residential threshold is a proportionate change that will broaden access to collective enfranchisement and the right to manage for leaseholders, giving them more choice and control over the management of their building, and that the significant benefit to leaseholders outweighs the potential concerns. Where there are viability concerns with a development, there will be a range of options developers can explore to adapt or re-design their proposals. Many new purely residential buildings and mixed-use buildings are being built where leaseholders have the right to enfranchise and the right to manage and this has not deterred investment overall.”

In this regard the IA adopted the fully-reasoned conclusions of the Law Commission in the Enfranchisement Report at [6.317] et seq and following, which reported on the significantly high levels of dissatisfaction expressed about the 25% limit in the consultation process, and their decision that the right to collective enfranchisement should be approached by reference to the question of whether a building was “predominantly residential” which they concluded was fairly defined by reference to a 50% test. A 50% limit was also the outcome of the Government consultation reported in the Commonhold Response, [2.16] which stated, “we believe a 50% limit provides a more accurate measure than a 25% limit of whether a building is residential” and “strikes a fairer balance.”

In relation to mandatory leasebacks paras. 149 and 152 of the IA stated:

“149.

Freeholders have also argued that the use of a mandatory leaseback as part of a successful collective enfranchisement claim could represent a significant loss to them. They argue they will be required to exchange a freehold interest for a less valuable leasehold interest. They argue that they will be unable to realise redevelopment opportunities for such units without freehold ownership of the wider building, making the leaseback less valuable than the freehold interest they lost. They argue that commercial units will be less attractive to commercial tenants if they only own them on a leasehold basis as an intermediate landlord. Commercial tenants will want assurance that the wider building will be maintained to an acceptable standard and faults dealt with swiftly, something they will not be able to guarantee without freehold ownership of the wider building. They argue that this loss in value will be exacerbated if leaseholders are unable to successfully manage these buildings following the transfer of freehold ownership. For the above reasons, freeholders argue that mandatory leasebacks will discourage redevelopment and investment in mixed-use buildings and spaces in the same way as increasing the non-residential limit to 50%. Whilst we acknowledge this concern, we note that the Law Commission stated, ‘a 999-year leaseback is a valuable interest […] [and] virtually the whole of the value of the relevant part of the premises remains with the landlord’.

152.

We do not expect freeholders will exit the market as following our reforms; many freeholders will continue to hold a valuable long-term interest in leasehold buildings, including from the receipt of ground rent where permitted and premiums from lease extensions. While we are making it easier and cheaper for leaseholders to acquire their freehold, and this may displace freeholders of some buildings, it is possible that freeholders [subject to collective enfranchisement] might expect to hold 999-year leasebacks over flats not participating in the enfranchisement. They would then continue to receive income from a share of the premium in the event they decided to extend their leases. …”

Given that landlords had contended that the 50% non-residential ceiling and mandatory leaseback reforms would give rise to similar adverse effects, these paragraphs should be read together with [143] – [146] of the IA.

Once again, the IA adopted the carefully reasoned proposals of the Law Commission in its Enfranchisement Report [5.154]-[5.155], on the basis that this would render collective enfranchisement more achievable while ensuring fairness to landlords in the form of a valuable 999-year lease for non-participating flats.

We consider that the Government and legislature were entitled to proceed on the basis of those assessments which represented adjustments to the existing collective enfranchisement scheme derived from practical experience of its operation, for which careful and persuasive justifications were offered. Further, we note that these measures were aimed at removing obstacles to freehold enfranchisement in multi-tenanted buildings. If, as we have concluded, the terms on which the transfer of freeholds or grants of extended leaseholds by landlords will now take place are A1P1 compliant as a means of addressing the inherent unfairness of leasehold as a model of property ownership and the resultant imbalance of power in the landlord-tenant relationship, then we do not see how the removal of obstacles to tenants exercising those (ex hypothesi) A1P1-compliant rights of enfranchisement can have the effect of rendering the scheme incompatible with A1P1.

In summary, even taking into account these additional measures, we remain of the view that the three measures under challenge are compatible with A1P1. The claimants’ cumulative challenge does not affect our conclusion that the measures represent a proportionate remedial response to the imbalance between landlords and tenants for all enfranchisable leaseholds and to the wasting asset problem.