As the consultation on the proposed ban of leasehold closes we take a deep-dive into the proposals and what might come out of the consultation.
In January this year we introduced you to the Commonhold and Leasehold Reform Bill, the new proposed legislation which, if enacted, will radically overhaul property ownership in England and Wales. In particular, the ban on leasehold ownership of flats will likely have repercussions throughout the property industry.
Scope of ban
The current scope of the ban would catch:
- New blocks of flats (including Build to Rent blocks where owners later sell flats off);
- A house which is newly converted into flats;
- Mixed-use buildings which contain at least one flat. In this scenario, the landlord of the commercial unit will be treated as the commonhold unit owner; and
- Flats in other buildings which have no leasehold flats at the time of the ban coming into force (e.g. vacant buildings which are developed into flats).
Whilst this is a comprehensive list, there are plans for exceptions to the ban, including shared ownership leases, home purchase plans which use leasehold structures (including Islamic finance products) and certain equity release products.
The consultation asks for views on the scope and the proposed exceptions. It also asks whether commercial buildings which do not currently have any residential flats should be caught and whether the current exemptions for certain types of land (flying freeholds, agricultural land, land subject to a compulsory purchase and places of worship/education) should continue. The consultation also asks a general question as to whether there are any other land ownership arrangements or types of developments which should be exempt.
It will be interesting to see what, if any, changes are made to the Bill as a result of the views obtained. One would anticipate that landlords/investors who currently derive income from leasehold properties and developers using complex leasehold structures to provide housing will be keen to narrow the scope of the ban, whilst those who work and operate on the tenant-side may be more inclined to extend commonhold.
Although the Bill does not apply to flats let on leases at the time the ban comes into force, it does intend to provide a right for leaseholders to convert their tenure to commonhold where 50% of tenants are in favour. This raises questions as to how investors can protect their investments in a situation where they will become a minority leaseholder.
Enforcement
The Bill proposes that where leases are unlawfully granted in commonhold buildings, or multiple leases unlawfully granted where the building ought to be commonhold, then the leaseholders in question will have the right to acquire their flat as a commonhold unit at no cost to them.
Timing
There is no definitive date for the ban to come into force. It is suggested that there will be phased implementation, with smaller blocks being subject to the ban sooner than larger, more complex blocks. This is to allow developers, businesses and buyers to become accustomed to commonhold.
The consultation asks for views on staged implementation and on what types of developments might require more time to prepare for commonhold.
The consultation also deals with development land that is owned on a leasehold basis. The suggestion is that where a developer cannot acquire the freehold (with one example being where a freeholder will not sell) then commonhold will not apply. As mentioned above, land is often acquired for development within complex leasehold structures and so the outcome of the consultation on this point will be another point of interest for developers in particular.
There is no doubt that the ban on leasehold properties will have a revolutionary effect on home ownership, creating a two-tier system of existing leases compared with commonhold on new developments. Developers and investors who operate with complex lease structures will need to engage with government or adjust business models in due course to fit the new rules. Whether the proposals for a reinvigorated commonhold model can work alongside the ongoing leasehold flats which will remain, as well as in harmony with legislation (such as the Building Safety Act 2022 which is predicated on leasehold structures) is something that will need to be worked through in the progression of the legislation. Fundamentally, it remains to be seen over time whether commonhold will be any less contentious than the existing leasehold system.
