Leasehold reform update – Part 1
The leasehold sector has come under significant scrutiny in recent years with many viewing it as an unsatisfactory form of property ownership subject to abuse. There is pressure on the Government to push for reform which, if implemented, will offer a much higher level of protection to leaseholders.
The proposals started in 2014 with a study by the Competition and Markets Authority (CMA) on residential property management. The CMA report made various recommendations for the sector and was followed by the DCLG consultation paper in July 2017 – 'Tackling unfair practices in the leasehold market'.
In December 2017 the Government issued their response to the consultation and proposed, amongst other things:
- banning leases of new build houses (save in specified circumstances such as shared ownership);
- ground rents in all leases to be zero or a peppercorn;
- considering future issues and reviewing of some of the relevant legislation relating to enfranchisement / lease extension, the right to manage and commonhold; and
- giving freeholders equivalent rights to leaseholders to challenge service charges.
Here we consider the consultations that have been published by the Law Commission in recent years covering reforms to enfranchisement and lease extension, the right to manage and also commonhold.
Leasehold home ownership: buying your freehold or extending your lease
This consultation closed on 7 January 2019 and the Law Commission's final report is now awaited.
The Law Commission was asked to review the current enfranchisement process to make it simpler, quicker and more cost effective. They have examined the options to reduce the price payable by leaseholders to enfranchise, while also providing enough compensation to landlords to reflect their legitimate property interests.
The proposal is for a single procedure under which any of the proposed enfranchisement rights can be claimed. If the proposals are implemented, the rights will be contained in a single piece of legislation which, amongst other things, will provide for standard notices, limited costs liability for leaseholders, more power for the tribunal to decide disputes and a new right to participate in an earlier enfranchisement. It is clear that the reforms will significantly enhance and improve the rights for leaseholders.
The Commission's view is that a single procedure will remove inconsistencies and reduce the risk that any party will make a mistake by confusing one procedure with another. They hope this will reduce opportunities for one party to take tactical advantage of the other.
Leasehold home ownership: exercising the right to manage
This consultation closed on 30 April 2019.
Qualifying tenants are currently entitled to exercise a right to manage pursuant to the 2002 Act. These tenants can force the transfer of the management functions of their building to a "right to manage" company of which the leaseholders are members. There is no need to demonstrate mismanagement to exercise this right, although unfortunately this is often at the core of a lot of right to manage claims.
The Law Commission have reviewed the right to manage procedure under the Commonhold & Leasehold Reform Act 2002 (2002 Act) and their proposals aim to make the process simpler, quicker and much more flexible. They propose the following changes:
- that the qualifying criteria is relaxed so that leasehold properties with more than 25% non-residential use can participate;
- permitting multi-building RTM companies on estate;
- reducing the number of notices that leaseholders must serve;
- giving the tribunal the discretion to waive procedural mistakes;
- clearer rules for the transfer of information about management functions; and
- favourable changes for the leaseholders to the costs rules (tribunal costs and nonlitigation costs).
Reinvigorating commonhold: the alternative to leasehold ownership
This consultation closed on 10 March 2019 and the final report is awaited.
The Government asked the Law Commission to propose reforms to reinvigorate commonhold as a workable alternative to leasehold, for both existing and new homes. It is clear that commonhold under the current legislative structure is not working with limited commonholds being created since it was introduced by the 2002 Act.
Commonhold allows freehold ownership of individual flats, houses and non-residential units within a building or estate. The rest of the building or estate forming the commonhold is owned and managed by the unit-holders through a commonhold association. A commonhold community statement sets out the rights and obligations of the commonhold association and the leaseholders.
In this consultation the Law Commission have made proposals they hope will overcome the shortcomings in the current legislation. In particular their proposals will:
- enable commonhold to be used for mixed-use developments with residential properties and also commercial units (which may include retail units, restaurants and leisure facilities);
- improve mortgage lenders’ confidence in commonhold, something which has historically been problematic;
- provide homeowners with more control over the service charges of the commonhold and require early decisions in relation to costs to be spent on maintenance;
- allow certain limited types of leases to continue to be used within a commonhold scheme. Shared ownership leases are specifically mentioned in the consultation as an exception to the general rule that long leases are not permitted within a commonhold structure; and
- make the conversion of an existing leasehold scheme to commonhold easier. However, the proposals are still very complex and many feel not sufficient to provide leaseholders, freeholders and mortgagees the confidence to convert current schemes.
The proposals are extensive and it is still not entirely clear how they would work in practice with a number of issues that need further clarification. However, it is apparent that the Government wants to ensure that commonhold is promoted as a viable alternative to leasehold moving forward.
Leasehold law is set to change significantly. The Government continues to be under pressure to ensure that changes are implemented and so, whilst many feel that the reforms may be some way off, we need to be prepared for the changes which now seem inevitable.