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Law Commission heralds new lease of life for residential property

Just like buses and government slogans, it seems that Law Commission reports on the future of residential property in England and Wales come in threes.  Following separate, lengthy consultations, the Law Commission has this week published its proposals for reforming leasehold enfranchisement, tenants’ statutory right to manage (“RTM”), and Commonhold ownership.

It is estimated that there are more than 4 million residential leasehold properties in England alone (18% of all housing stock), with an increasing number of newly built houses being sold on long leases rather than as freeholds.  The government has decided that the long leasehold sector is beset with problems, including extortionate ground rents and a system for extending leases which is disproportionately expensive and complicated.  In July 2019, then Prime Minister, Theresa May, pledged to bring forward legislation to ban the sale of new leasehold houses, cap ground rents and give residential tenants more rights and protections against unscrupulous developers.

The Law Commission’s three reports are intended to complement each other and transform the residential sector, by empowering leaseholders to extend their leases or buy out their freehold, whilst reinvigorating commonhold as an alternative form of property development and ownership.

Leasehold enfranchisement and the right to manage

One of the biggest complaints about the existing enfranchisement regime is that it is prohibitively complex and expensive – in terms of the premiums payable for extending a lease or buying a freehold and the legal and professional fees involved.  The Law Commission is proposing reforms that will make enfranchisement more accessible and effective for consumers.  These include:

• Introducing a right to a 990 year extension rather than just 90 years for all “residential units”;

• Removing the obligation for leaseholders to pay their landlords’ costs;

• Extending collective enfranchisement to include shared ownership tenants, mixed-use buildings that are up to 50% non-residential, and multiple buildings on a single estate (reflecting today’s housing estates and mixed-use developments); and

• Making the process for calculating premiums more transparent and fair, and bringing them down by allowing leaseholders to require freeholders to take a lease back of some flats.

Where for any reason leaseholders of flats cannot or do not want to acquire their freehold, then the statutory right to manage (RTM) can still allow them to take control of how their building is managed, including by raising service charges and carrying out repair work.  Under the new proposals:

• As with enfranchisement, and to reflect the reality of modern housing and mixed use developments, the RTM would be extended to include the owners of residential units (whether that is a house on an estate, or a flat);

• The RTM would be extended to include buildings that are up to 50% non-residential, and leaseholders on an estate would be able to exercise a right to manage in respect of the entire estate rather than individual buildings; and

• Improved training would be made available to help RTM companies manage their affairs and future management of their building.

Making commonhold more common

Finally, the third Law Commission paper recommends sweeping changes to the commonhold regime.  A commonhold structure is unique in England & Wales (though there are successful, comparable structures elsewhere in the world), in that the freehold is held by a commonhold association, and each flat owner owns their individual units, whist being members of the commonhold association.  There has been little take-up across England & Wales since commonhold was heralded in 2004 as an alternative to leasehold ownership, which has been put down to its complexity and inflexibility as well as a very cool response from developers of new residential buildings.

The wide-ranging recommendations (121 in total) intended to breathe life into the regime and change the imbedded culture of leasehold ownership in the UK include:

• Tightening up management rules within a commonhold association, so that key decisions require support from a substantial proportion of its members, giving more comfort to members;

• Allowing greater flexibility in the apportionment of costs by the commonhold association between its members’ units, including insurance, heating and other service costs, and requiring a commonhold association to hold a fund for future and unexpected major expenditure;

• Limiting the scope for dissenters and third parties to prevent the conversion of a building to commonhold where the majority are in favour of conversion;

• Providing robust rules for enforcement of commonhold contributions against non-payers, including a right to apply to the tribunal for an order for sale of a defaulting member’s unit; and

• Generally, allowing for a more flexible range of commonhold structures, moving away from the current one-size-fits-all regime that has been so off-putting to developers.

These three Law Commission reports together form a comprehensive and joined-up programme for changing residential leasehold ownership in England & Wales.  Changes to the enfranchisement and RTM regimes should put leaseholders in greater control of their own properties, with longer leases and fewer unfair ground rents.  If successfully reinvigorated by the proposed reforms, and adopted by developers as well as existing leaseholders, commonhold may finally become more prevalent in the market and a genuine alternative to the creation of new leaseholds.