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Arc and the impending flood of leasehold reform

Arc and the impending flood of leasehold reform

Overview

The Leasehold and Freehold Reform Act 2024, which received Royal Assent on 24 May 2024, contained the framework for various reforms to the residential long leasehold regime.  One such reform would reduce the premium paid to their landlords by leaseholders upon collective enfranchisement. In R (ARC Time Freehold Income Authorised Fund) and others v The Secretary of State for Housing, Communities and Local Government [2025] EWHC 2751, a group of freeholders brought judicial review proceedings against the Government, arguing that the proposed changes in the enfranchisement formula would constitute a breach of Article 1 of the First Protocol of the European Convention of Human Rights.

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

Article 1 of the First Protocol of the European Convention of Human Rights

In particular, they claimed that the proposed abolition of marriage value, the cap on the cost to leaseholders of buying out the ground rent at 0.1% of the freehold value, and the removal of their ability to recover their costs in enfranchisement claims would be incompatible with their peaceful enjoyment of their property.

Whilst acknowledging that these reforms would interfere with their property rights, the High Court rejected the case, holding that Parliament was entitled to pursue reforms aimed at making enfranchisement cheaper and simpler, and that the reductions in compensation did not impose an “excessive burden” on landlords.  It found there was “robust justification” for each measure and that a “fair and proportionate balance has been struck."

A key plank of their finding was that it would be unreasonable for landlords to prevent socially desirable or necessary amendments to legislation on the grounds that the legal framework for residential leaseholds will (on which landlords make their investment decisions) would never change.

Parties may choose to arrange their affairs on the basis of legislation as it exists and hope that it will not be amended, but in doing so they take the risk that it may change and, indeed, in ways which may be unpredictable.
Lord Justice Holgate and Mr Justice Foxton

The freeholders have confirmed that they plan to appeal the decision of the High Court, apart from the John Lyon’s Charity (an estate-funded charity which gives grants to benefit children and young people) which has said it will not take part in the appeal proceedings.

Commentators have suggested that the judgment was a robust decision leaving little scope for the freeholders to succeed in their appeal and leaving the way clear for the Government to proceed with its extensive programme of implementing the remaining provisions in the Leasehold and Freehold Reform Act 2024. Nonetheless, the appeal case may have the effect of delaying this process.

Freeholders of multi-let residential properties will be aware of other, possibly more significant challenges ahead including the anticipated reinvigoration of commonhold (including mandating commonhold for new flats and streamlining the conversion process) and the threat of capping ground rents in existing residential leases (the previous government consulted on this proposal in 2023/2024 and the Labour Manifesto included a pledge to cap residential ground rents at £250 per annum).

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