The leasehold housing market has long been criticised for its unfairness, opaqueness and general poor practice. In 2017 the Government announced their intention to promote transparency and fairness for the growing number of leaseholders in the UK. Earlier this year, the Law Commission published their proposals to improve the current leasehold regime.

What has been proposed?

There are three areas the Law Commission focused on reforming:

  1. Leasehold Enfranchisement
  2. Tenant’s Right to Manage
  3. Commonhold

These proposals are aimed at giving leaseholders more control and autonomy over their homes than they have under the current system.

Leasehold Enfranchisement

This is the process by which a leaseholder may extend their lease and buy the freehold of their property.

The enfranchisement process in the past has been deemed costly, complex and lacking in consistency. For example, there are different extension rules for houses (50 years, allowed once) and leases (90 years, allowed multiple times).

Following the Law Commission’s report, the recommendations include:

  • Introducing a new right for leaseholders of houses and flats to an extension for a term of 990 years with no ongoing ground rent, to reduce costs of repeatedly extending short leases.
  • Assimilating the treatment of houses and flats so far as possible, and streamlining the procedures to reduce cost and delay.
  • Capping the level of ground rent used to calculate the premium to help those leaseholders with onerous ground rents.
  • Extending the right to enfranchise to residential leaseholders who live in mixed-use developments with up to 50% commercial space and those with multiple buildings.

The proposals are aimed at clarifying and simplifying the existing law to make the whole process of enfranchisement easier and less expensive. However, there are concerns that standardisation may lead to unbalanced, less tailored results and that a formula for calculating premiums will eliminate ‘marriage value’- the increase in value following a lease extension-  and ‘hope value’- the value of the land based on its potential for extension in the future. This may act as a disincentive to investors in the residential property market, and may increase the loan to value margins of mortgage lenders due to lowered reversionary and security value of properties.

Right to Manage

This is the process by which leaseholders obtain control over the management of their buildings without buying the freehold.

Previously the right to manage has had limited uptake due to its restrictive criteria and complexity. The leaseholders have been forced to bear the costs of the landlord and there are uncertainties over which Landlord and management company obligations are transferable.

The Law Commission’s proposals target these issues and include suggestions to:

  • Relax the qualifying criteria to include mixed-use buildings (those with more than 25% non-residential space, and possibly 50%).
  • Reduce the number of notices which must be served by leaseholders, and give the First-Tier Tribunal (Property Chamber) the power to waive procedural mistakes.
  • Require each party to bear their own costs of any necessary litigation.
  • Give clearer rules regarding the transfer of management functions.

Leaseholders experienced difficulties in exercising their rights to manage due to the vagueness of the legislation, and so the proposed reforms focus on clarification and efficiency.  Additionally, as mixed-use developments become increasingly common, given their attractiveness to developers, the Law Commission wishes to ensure that those leaseholders living in these properties don’t miss out on leaseholder rights. This is especially so in cases where leaseholders lack awareness of their rights and obligations at the time of entering into their lease.

Commonhold

A commonhold is a form of freehold title, which allows owners to own their flats forever without a landlord and pass on positive obligations to future owners, comparable to strata title in Australia and condominium in the USA. Not all land is capable of being commonhold, but most residential developments are amenable to it. It was introduced for new developments but it is possible to convert existing leasehold developments provided the correct statutory procedure is followed.

The Law Commission intends to reinvigorate commonhold as the alternative to leasehold in the UK. In the past, the vagueness of the legislation led to uncertainty over its implementation and a consequential lack of confidence in it as a system. For example, commonhold provides that disputes must be resolved by conciliation and mediation rather than litigation; however, the approved ombudsman scheme by which this is to happen is yet to appear.

The proposed reforms aim to make commonhold more viable as an option to developers and leaseholders. They focus on new commonhold structures rather than existing ones (but this is less of an issue as there have been fewer than 20 since it was introduced in 2004). They recommend the removal of the requirement for unanimous consent to convert to commonhold by leaseholders and other interested parties. They also recommend reforming the commonhold community statement – the current ‘rulebook’, in an effort to make the process less complex and more efficient and fit for purpose.

Other proposed reforms

Other reforms to the current leasehold regime proposed prior to July 2020 include:

  • Banning the sale of houses on a leasehold basis.
  • Limiting ground rents to a nominal value (not exceeding 0.1% of the property value).
  • Regulating letting agents, by introducing a mandatory code of practice, requiring a nationally recognised qualification of practice or creating an independent regulator to oversee this.
  • Introducing new and more stringent requirements for properties to qualify for the Help-To-Buy schemes in England and Wales which include having a genuine reason for the houses to be leasehold and minimum terms for long leases.

These proposals would immeasurably improve leaseholder’s choice within the housing market. They protect leaseholders from the unfortunate position of entering into leases with rocketing ground rents. They address the current problem of developers selling houses on a leasehold basis for no other reason than to extract a profit – leasehold currently is the most attractive option to developers as it offers both the sale of the freehold and the leasehold, as well as other possible income streams such as permission fees. These proposals make leasehold less enticing to developers and thus open to alternatives such as commonhold. Increasing regulation of the housing market aims to prevent unfair referrals stemming from close relationships between conveyancers, developers and managing agents. However, despite being proposed by the Law Commission and responded to by the Government in 2017 and 2018, we are yet to see these proposals bear fruit.

Of course, these are all proposals and are yet to be enacted as legislation. Leasehold reform is a difficult task and there are a number of different and contradictory stakes involved which must be carefully and proportionately balanced. The Government’s response is the next stage; the extent to which these reforms will be implemented in legislation remains to be seen.

However, non-legislative steps have been taken in the meantime while these proposals make their long way to legislation. In 2019, a Government-backed pledge committed developers, freeholders and agents to take concrete steps to help leaseholders stuck in unfair deals. This pledge targets some of the worst identified issues in the leasehold system, such as committing to amend existing leases with onerous doubling clauses and managing agents committing to act fairly and transparently. While signatories are not bound to uphold it, as a public pledge it raises awareness of these problems and assures leaseholders that those who benefit currently from leasehold are taking active steps to protect leaseholder interests.

Our Real Estate team are here to help you, you can contact us via email or by calling us on 0161 941 4000 for any leasehold issues you may have.