Leasehold Reform: The Future of Home Ownership

LAW COMMISSION PUBLISHES PROPOSALS FOR LEASEHOLD REFORM: VISION FOR HOME OWNERSHIP IN THE FUTURE.

"THE LEASEHOLD SYSTEM IS NOT WORKING FOR MILLIONS OF HOMEOWNERS IN ENGLAND AND WALES. WE HAVE HEARD HOW THE CURRENT LAW LEAVES THEM FEELING LIKE THEY DON’T TRULY OWN THEIR HOME. OUR REFORMS WILL MAKE A REAL DIFFERENCE BY GIVING LEASEHOLDERS GREATER CONTROL OVER THEIR HOMES, OFFERING A CHEAPER AND EASIER ROUTE OUT OF LEASEHOLD, AND ESTABLISHING COMMONHOLD AS THE PREFERRED ALTERNATIVE SYSTEM."

Professor Nick Hopkins, Law Commissioner for Property Law

"THE BALANCE OF POWER IN EXISTING LEASES, LEGISLATION AND PUBLIC POLICY IS TOO HEAVILY WEIGHTED AGAINST LEASEHOLDERS, AND THIS MUST CHANGE."

Housing, Communities and Local Government Select Committee

• The Law Commission (Commission) has published three reports (21 July 2020) on commonhold, enfranchisement and the right to manage in which it recommends reforms to create fit-for-purpose home ownership across England and Wales.
• Each report outlines a comprehensive programme of reforms aimed at tackling some key issues that existing leaseholders currently face, and to improve the leasehold system to promote "transparency and fairness in the residential leasehold sector" and to provide "a better deal for leaseholders as consumers" (it has been estimated there are at least 4.3 million leasehold homes in England alone).
• The Commission has proposed significant changes to improving the commonhold system to address some of its most unattractive features nearly two decades after the concept was unsuccessfully introduced.
• The Commission's view is that commonhold is the preferred alternative to leasehold as a way of owning homes and leasehold is no longer needed for home ownership. The Commission's recommendations about commonhold are aimed at creating a workable alternative to leasehold ownership, with a view to its widespread use in the future (although without any compulsion and hence creating doubt about whether it will be used in practice).
• If enacted, the reforms will pave the way for a system where flats are sold with freehold title (as part of a commonhold).
• More importantly, the Commission has called on the Government to either incentivise the take up of commonhold or even to make it mandatory for flats.
• The reforms work in tandem with the government's own proposals for leasehold reform published in 2019.
• If the Commission's recommendations are accepted, new laws would enable existing leaseholders to gain more control over their properties, with significant consequences for developers and ground rent investors.
• Housing Minister, Luke Hall, commented "we are clear that the current system needs reform" and the government will ‘carefully consider’ the recommendations, "which are a significant milestone in our reform programme, as we create a better deal for homeowners".

WHAT IS COMMONHOLD?

Commonhold is an alternative form of property ownership which was first introduced in 2002. It enables the residents of a building to own the freehold of their individual flat (called a “unit”) and to manage (or appoint someone to manage) the shared areas through a company.  Consequently, no ground rent is payable and the homeowner has greater control over the property than leasehold. The ethos behind commonhold is that it is specifically designed to regulate the relationship between groups of people whose interests are broadly aligned. However, it has not proved popular and less than 20 commonholds have been created since the legislation came into force due to its lack of appeal to investors and developers alike and the difficulties with converting existing leasehold properties to commonhold. Mortgage lenders are reluctant to lend against commonhold units and consumers are still unfamiliar with it as a form of ownership.

OWNERS YET TENANTS

The vast majority of flats are sold on a long leasehold basis. The root cause of many criticisms that have been levelled at leases is that they are time limited, do not provide outright ownership and the value of a lease tends to reduce over time. A leaseholder also has less control over its property than freehold owners, for example, a leaseholder may not be able to make alterations to their home without landlord's permission.

LAW COMMISSION REPORTS

These cover:

• Leasehold enfranchisement: the right for people who own property on a long lease (“leaseholders”) to buy the freehold or extend their lease. Recommended reforms would create an improved enfranchisement regime that would be simpler and cheaper for leaseholders in flats and houses. In particular, leaseholders may no longer be required to pay the landlord’s legal costs.
• The right to manage (RTM): the right for leaseholders to take over the management of their building without buying the freehold. Recommended reforms would make it easier and cheaper for leaseholders to take over the management of their building by exercising their right to manage.
• Commonhold: which allows for the freehold ownership of flats, offering an alternative way of owning property which avoids the shortcomings of leasehold ownership. Recommended reforms would give leaseholders a route out of leasehold by making it easier to convert to commonhold.

"THIS GOVERNMENT IS DETERMINED TO IMPROVE TRANSPARENCY AND FAIRNESS IN THE RESIDENTIAL LEASEHOLD MARKET TO HELP THOUSANDS OF LEASEHOLD HOMEOWNERS UP AND DOWN THE COUNTRY AS WELL AS FUTURE HOMEBUYERS."

Luke Hall, Minister for Rough Sleeping and Housing

Perceived problems associated with leasehold home ownership include:

• Conflict between landlords who want an attractive investment opportunity and a valuable asset with income generation through ground rents, lease extensions and administrative fees and home owners who want outright ownership and control, security and investment.
• Legal, practical and financial obstacles for leaseholders seeking to exercise their statutory rights.
• High and escalating onerous ground rents.
• Excessive service charges, legal fees, or permission fees levied by landlords.
• Absence of any compulsory regulation of managing agents.
• The legal entitlement of landlords to “forfeit” (terminate) a lease if the leaseholder breaches a term of the lease.

FIT-FOR-PURPOSE HOME OWNERSHIP

The Commission’s recommendations and the government’s own reforms fall into two categories.

• paving the way for the future: laying the foundations for homes to be able to be owned as freehold via commonhold
• essential reform of leasehold: addressing problems for leaseholders in the present.

The overreaching objective is to provide a better deal for leaseholders by expanding and improving leaseholder rights and restoring confidence.

SUMMARY: REFORMS THAT LAY THE FOUNDATIONS FOR HOME OWNERSHIP TO BE FREEHOLD

SUMMARY: ESSENTIAL REFORM OF LEASEHOLD: ADDRESSING PROBLEMS FOR LEASEHOLDERS IN THE PRESENT

The Commission acknowledges that the shift away from leasehold to freehold ownership will take time (a possible understatement in the context of many 999 year leases). As a result, the Commission recognises that the current leasehold system needs to be improved further now for the benefit of leaseholders. In addition to the proposals regarding improving enfranchisement and RTM, the Commission supports the government measures outlined in its response to tackling unfair practices in the leasehold market.  Proposals include:

THE FUTURE THROUGH THE EYES OF THE COMMISSION

OWNERS OF FUTURE HOMES 

• Houses will always be sold on a freehold basis (because the Government intends to ban the sale of houses on a leasehold basis (subject to exceptions))
• Flats will:
  • be sold solely on a freehold (that is, “commonhold”) basis – if the Government requires commonhold to be used and bans residential leaseholds;
  • sometimes be sold on a commonhold basis and sometimes on a leasehold basis – if the Government actively incentivises commonhold, but does not go as far as to ban leasehold, or
  • continue (as is presently the case) to be sold on a leasehold basis – if the Government takes no action to require or incentivise the use of commonhold and/or does not ban leasehold.
• The Commission's view is that commonhold will be a viable alternative to leasehold because its recommendations will make commonhold workable. If any homes are sold on a leasehold basis, they will not contain any ground rent obligations (because the Government intends to restrict ground rents to zero (subject to exceptions)) and it will be significantly cheaper for leaseholders to extend the lease of their flat in line with the Commission's proposals.

LEASEHOLD OWNERS OF EXISTING (AND SOME FUTURE) HOMES

"WHILE THERE CAN BE AN AMBITION FOR FREEHOLD TO BE THE BASIS OF HOME OWNERSHIP IN THE FUTURE, IT IS CRUCIAL TO RECOGNISE THAT LEASEHOLD WILL CONTINUE TO EXIST FOR SOME TIME."

Law Commission

For those leaseholders:

• It is necessary for various problems with leasehold ownership to be resolved.
• They will need to have the improved rights to buy the freehold or extend their lease, and, in the case of flats, to convert to commonhold and to take over the management of their block. The recommendations made in the reports on enfranchisement and the right to manage will improve the position of existing leaseholders.

INDUSTRY COMMENT

"LEASEHOLD REFORM IS A COMPLEX AND IMPORTANT TASK WITH MANY DIFFERENT INTERESTS AT STAKE. WE SHARE THE LAW COMMISSION’S BELIEF THAT IT'S SUGGESTED REFORMS SHOULD DELIVER REAL BENEFIT FOR HOMEOWNERS, AND THAT ITS RECOMMENDATIONS WILL PROVIDE THE FLEXIBILITY FOR COMMONHOLD TO DEVELOP AS AN ALTERNATIVE TO LEASEHOLD, IF INCENTIVISED FURTHER BY GOVERNMENT."

Simon Davis, President of the Law Society of England and Wales

"THE NLC IS DELIGHTED THAT THE LAW COMMISSION’S REPORTS RECOGNISE HOW BADLY THE CURRENT LEASEHOLD SYSTEM IS STACKED AGAINST LEASEHOLDERS AND IS RECOMMENDING ADOPTION OF COMMONHOLD, AND INFORMED AND PRACTICAL ROUTES FOR EXISTING LEASEHOLDERS TO ESCAPE FROM THE NIGHTMARES CREATED BY THIS FEUDAL SYSTEM. WE NEED GOVERNMENT TO ACT ON THESE RECOMMENDATIONS NOW. THEY MUST NOT BE LOST IN A SEA OF ENDLESS CONSULTATIONS, FURTHER CONSIDERATION AND DRIFT “UNTIL PARLIAMENTARY TIME ALLOWS”. LEASEHOLDERS’ LIVES ARE ON HOLD AND URGENT ACTION IS NEEDED."

Katie Kendrick, Founder of the National Leasehold Campaign

COMMENT

The Commission has provided a clear signpost for the direction of travel for the future of home ownership in England and Wales. The Commission acknowledges that leasehold will not end overnight (or indeed for hundreds of years potentially), but, in the future, they hope commonhold will be preferred to leasehold. The report concludes that commonhold will not be used unless it is compulsory or adequate incentives are in place to make it preferable to leasehold.

It is apparent that the proposals will require a significant amount of Parliamentary time before legislation can be introduced. Currently, it looks like the proposals may have to take their place in the queue behind more pressing matters. That said, the issue of home ownership is high on the political agenda and the government has recognised the need for more housing to address the current housing crisis. The COVID-19 pandemic, and the requirement to “stay at home” that followed, has highlighted how much we depend on our homes.  It also needs to get over the problems that commonhold as currently legislated has in dealing with multi-use properties, the complexity of many housing developments especially in cities, with commercial uses in the same building and different housing tenures (e.g. affordable uses).  And mortgage funders need to be comfortable that it works for them.

Much will depend on the government's willingness to bring the changes into force and whether it chooses to reform the leasehold sector in whole or in part and whether leaseholders and developers/landlords will embrace the reforms. If the Government accepts the Commission's recommendation on commonhold, it would represent a radical change to home ownership and a re-writing of the text-books.

One thing does look certain, the reforms look set to change the way that property is owned, operated and used more comprehensively than at any time since the early 1920s.

ENFRANCHISEMENT

SUMMARY OF THE LAW COMMISSION'S REPORT ON LEASEHOLD HOME OWNERSHIP: BUYING YOUR FREEHOLD OR EXTENDING YOUR LEASE (ENFRANCHISEMENT)

Enfranchisement is a statutory right for long leaseholders to purchase the freehold of the property or to extend their lease. Collective enfranchisement enables leaseholders of neighbouring flats to join together to buy the freehold of their block. However, the process can be complex, expensive and often considered unfair with unexpected fees, procedural traps and costly delays. 

Law Commission Report (LC 392) here.

Law Commission Summary here.

STREAMLINING AND SIMPLYFYING THE LAW

Key recommendations in a nutshell

• reduce the costs of making an enfranchisement claim
• give leaseholders more control over those costs
• make enfranchisement rights available to more leaseholders in more types of property
• make the enfranchisement process less complicated and protect leaseholders from procedural traps 

KEY RECOMMENDATIONS ON BUYING YOUR FREEHOLD OR EXTENDING YOUR LEASE

RIGHT TO MANAGE

SUMMARY OF THE LAW COMMISSION'S REPORT ON LEASEHOLD HOME OWNERSHIP: EXERCISING THE RIGHT TO MANAGE (RTM)

The right to manage gives leaseholders the right to take over the management of their building without buying the freehold.

Law Commission Report (LC393) here.

Law Commission Summary here.

STREAMLINING AND SIMPLYFYING THE LAW

 Key recommendations in a nutshell

• reduce the costs of making an RTM claim
• give leaseholders more control over those costs
• make the RTM available to more leaseholders in more types of property
• make the process of claiming the RTM less complicated and less likely to be frustrated because of mistakes in the process.

KEY RECOMMENDATIONS ON THE RIGHT TO MANAGE

COMMONHOLD

SUMMARY OF THE LAW COMMISSION'S REPORT ON-INVIGORATING COMMONHOLD: THE ALTERNATIVE TO LEASEHOLD OWNERSHIP

The Commission wishes to invigorate commonhold as a workable alternative to leasehold (for both existing and new homes) so that it's fit for purpose for all those involved with a commonhold, including converting leasehold premises to a commonhold, living in a commonhold, building a new commonhold, or who are lending in respect of a commonhold.

Law Commission Report (LC 394) here.

Law Commission Summary here.

"COMMONHOLD SHOULD NOT BE LOOKED AT THROUGH THE LENS OF LEASEHOLD. COMMONHOLD INVOLVES A CULTURE CHANGE. IT MOVES AWAY FROM AN ‘US AND THEM’ MINDSET, TOWARDS ‘US AND OURSELVES."

Professor Nick Hopkins, Law Commissioner

KEY RECOMMENDATIONS ON RE-INVIGORATING COMMONHOLD